Gross income can be described to by a few different terminologies gross profit, gross pay, pre-tax income, or before-tax income just to name a few but do not let that baffle you. No matter what it is called, gross income is an essential number you need to know whether you want to evaluate a company or you’re filing your taxes. In this article, I will try to explain what gross income is, adjusted gross income, gross monthly income, and what is gross annual income in detail.
What is Gross Income?
Gross income has a different interpretation for individuals and companies yet, both the interpretations ultimately derive to a common definition. For an individual, gross income is the money earned by an individual from his/her employer before tax deductions. Also, the gross income of an individual may the total amount of money earned during a year. For companies, Gross income is nothing, but the gross profit earned during an assessment year.
For individual’s gross income is simply the gross salary or wage before any tax deductions. An individual can include other sources of income like rental or real estate income, capital gains, income from business or profession, and interest income. However, individuals can claim several deductions in gross income. Based on the number of the extent of exemptions, the taxable income is calculated.
Assume that Ramu earns an annual income of Rs 1, 00,000 from his consultancy work. Ramu also earns Rs 70,000 in rental income from his real estate properties, Rs 10,000 in dividends from shares he owns at Chandini Ltd, and Rs 5,000 in interest income from his savings account. Ramu’s Gross income can be calculated as follows:
Gross Income = 1,00,000 + 70,000 + 10,000 + 5,000 = Rs 1, 85,000
Gross Income for a Business
Gross income for a business is also known as gross profit and it is the company’s profit for the financial year before deducting interest and taxes. In simple terms, gross income is the money earned by a business by selling its goods and services during a particular period less direct expenses incurred in producing the goods being sold.
The direct expenses may include
- Direct labor
- Equipment’s used in the production process
- Supply cost
- Cost of Raw material and
- Cost of shipping the products from the point of production to the point of consumption
Please note the taxes are not deducted from the gross revenue since they are not direct expenses.
Gross Income = Gross Revenue-Cost of Goods Sold
Let us see an example to have clarity on what is Gross Income for a business
Assume that the gross revenue of Lunar Ltd, a paint manufacturing company, totaled Rs 13, 00,000 and the expenses were as follows:
Cost of raw materials: Rs 1,50,000
Supply costs: Rs 60,000
Cost of equipment: Rs 3,40,000
Labor costs: Rs 1,50,000
Packaging and shipping: Rs 1,00,000
The gross profit is calculated as follows:
Gross Income = (13,00,000) – (1,50,000 + 60,000 + 340,000 + 1,50,000 + 1,00,000)
= (13,00,000) – (8,00,000) = Rs 5,00,000
Gross Annual income considers 12 month’s income of an individual or business while monthly gross income considers one month’s revenue of an individual/business.
Adjusted Gross Income (AGI)
Now let me explain what Adjusted Gross Income is.
Adjusted Gross Income is the money you have earned during a period from your job, dividend, self-employment, or interest amount from the bank accounts after deducting your retirement contributions, tuition fees, and more. Adjusted Gross Income (AGI) is used during the tax filing purpose. Considering how you are filing your tax returns; you can also use Modified Adjusted Gross Income (MAGI) in your Adjusted Gross income while reconsidering some of your Deductions.
However, when you file your taxes online, most of the Adjusted Gross Income and Modified Adjusted Gross Income calculations are done by the systems. Remember! Adjusted Gross Income is calculated by making above the line adjustments to the gross income. The Adjusted Gross income generally reported on the IRS form 1040 and used to calculate the tax liability of individual taxpayers. It is important to understand that Adjusted Gross Income affects the taxpayer’s eligibility to claim many of the tax deductions and tax credits available on the tax returns.
Many United States citizens base a filer’s total tax bill on a calculation beginning with adjusted gross income. From that, state-specific deductions and credits are considered in the calculation of an individual’s state taxable income.
Some of the most important deductions made to reach an individual’s adjusted gross income include:
- Half of the self-employment tax
- Alimony paid
- Losses incurred from the sale or exchange of property
- Moving expenses
- School tuition, fees, and student loan interest
- Jury duty pay turned over to a filer’s employer
- Early-withdrawal penalties levied by financial institutions
- Healthcare savings account (HSA) deductions
- Contribution to retirement accounts
Now let me show you the procedure to calculate Adjusted Gross Income
Calculating one’s Adjusted Gross Income is a straightforward process but changing IRS rules sometimes makes it baffling. Here is an example of how it could work for a single person with a total income of Rs 1, 20,000 and the following qualifying above-the-line deductions:
Self-employed health insurance premiums: Rs 13,000
50% of self-employment taxes: RS 15,300
Student loan interest: Rs 450
IRA contributions: Rs 6,500
Your adjustments total Rs 35,250.
Subtract the adjusted total from Rs 1,20,000 and your AGI is Rs 84,750.
Finding your prior year Adjusted Gross Income on your 1040
Your prior-year AGI can be used to authenticate your automated return with the IRS. To find your Adjusted Gross Income on Form 1040 from the previous year, you need a copy of last year’s returns. From your previous year’s returns, you can find the amount listed on the following lines based on the form you used.
- If you filed Form 1040, your AGI will be listed online 7.
- If you filed Form 1040-NR, your AGI will be listed online 35.
I hope the article was useful to you. Please feel free to share your thoughts in the comments section.
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