Net Inco♎me vs. A🔯djusted Gross Income: An Overview

Understanding the difference between net income and adjusted gross income (AGI) can be crucial for managing your finances, whether you're preparing taxes, evaluating your take-home pay, or analyzing a business's profitability. Both ter🌜ms relate to income, but they differ in significant ways, especially when it comes to taxes.

All income starts with gross income, which is the total of all the money you make in a year. This includes salaries, wages, bonuses, 澳洲幸运5官方开奖结果体彩网:capital gains, and interest income.

But this differs from the money we take home and put into our bank accounts. Our 澳洲幸运5官方开奖结果体彩网:gross income is subject to taxes and often other𝄹 deductions that redꦡuce it to arrive at net income, which is also known as our take-home pay.

澳洲幸运5官方开奖结果体彩网:Adjusted gross income (AGI) also starts out as gross income. However, gross income is reduced by certain adjustments allowed by the Internal Revenue Service (IRS) and is tallied before a꧙ny taxes are calculated and paid.

One such adjustment is 澳洲幸运5官方开奖结果体彩网:contr🐻ibutions to traditional 401(k) retirement accounts. These contributions reduc⛄e taxable income and, therefore, the amount of taxes owed.🅘

What Is Net Income?

Net income is the amount of money you take home after🍸 all deductions have been made from your gross income. This is the amount that ends up in your bank account or paycheck.

Common deductions from your gross income that affect your net i🎀ncome include:

• Taxes: Federal, state, local, 澳洲幸运5官方开奖结果体彩网:Social Security, and Medicare taxes
• Pretax deductions: Health and dental insurance premiums. retirement plan contributions (e.g.,401(k)) and 澳洲幸运5官方开奖结果体彩网:flexible spending accounts (FSAs)

These deductions reduce your gross income and, in turn, lower the taxes withheld from your paycheck. The resulting amount is your net income, or take-home pay.

Net Income for Businesses

For businesses, net income is the profit after all expenses have been subtracted from gross revenue. It's also referred to as net profit or after-tax income and is reported on their 澳洲幸运5官方开奖结果体彩网:financial statements.

As with an individual's net income, a company's net income is determined by applying certain deductions to its gross earnings (gross sales or revenue).

Key expe🦄nses that reduce a business’s gross income to net income include:

• 澳洲幸运5官方开奖结果体彩网:Cost of goods sold (COGS)
• Operating expenses
• Interest expenses
• Taxes

What Is Adjusted Gross Income?

Adjusted gross income (AGI) is calculated by taking your gross income and subtracting certain allowable 澳洲幸运5官方开奖结果体彩网:deductions or adjustments. The IRS defines these deductions and can reduce an individual's gross income, thus reducing the taxes they will owe.

Common AGI deductions include:

• Contributions to retirement accounts (e.g., 401(k), IRA)
• Health insurance premiums for self-employed individuals
• Student loan interest
• 澳洲幸运5官方开奖结果体彩网:Alimony payments (for divorces finalized before 2019)
• Health Savings Account (HSA) contributions.
  

A single individual with a gross income of $110,000 in 2025 would be in the 24% 澳洲幸运5官方开奖结果体彩网:tax bracket on the portion of that income over $103,350 (see 𒁏tables for 2024 and 2025 federal tax brackets below).

If that figure were reduced as permitted by the IRS, it might result in an AGI of just $98,000. That would mean that their income would reach only the 22% tax bracket and no longer the 24%. The individual would now pay 22% tax on their highest dollars of income instead of 24%.

How AGI Affects Your Taxes

AGI is a critical starting point when filing your taxes on 澳洲幸运5官方开奖结果体彩网:Form 1040. It determines:

• Your taxable income: Income after deductions but before applying tax rates).
• The tax bracket in which your income falls: The IRS uses your AGI to determine your taxable income, which is then taxed according to the applicable federal tax brackets.
• Your eligibility for tax credits and deductions: Your AGI also determines whether you're eligible for specific tax deductions (like mortgage interest or student loan interest) and credits (such as the Child Tax Credit or the American Opportunity Credit).

If your AGI falls below a certain threshold, you may qualify for tax credits, like the 澳洲幸运5官方开奖结果体彩网:Earned Income Tax Credit (EITC), or deductions for m🐷edical expenses, mortgage interest, or student loan interest.

Here 🐼are some ways that deductions can be applied to gross income to arrive at AGI:

• 澳洲幸运5官方开奖结果体彩网:Self-employed individuals can deduct several expenses, including health insurance premiums and half of the 澳洲幸运5官方开奖结果体彩网:self-employment tax.
• Those who make contributions to 澳洲幸运5官方开奖结果体彩网:individual r🔯etirement accounts (IR🔥As) and qualified retirement plans can reduce their gross income by the amount contributed up to yearly limits.
• Reservists, qualified performing artists, and government workers who are paid on a fee basis can claim certain business expenses via 澳洲幸运5官方开奖结果体彩网:Form 2106.
• Those investing in a 澳洲幸运5官方开奖结果体彩网:Health Savings Account (HSA) can deduct that cost.
• The interest on student loans is tax deductible, although the 澳洲幸运5官方开奖结果体彩网:principal balance is not.
  

Federal Tax Brackets

Here are the federal tax brackets and rates that apply for tax year 2024.

And here are the federal tax brackets and rates that apply for tax year 2025:

All these expenses are standard above-the-line deductions that can take a while to sort through ,but it's well worth taking advantage of every tax break you can find.

Below-the-line deductions, such as 澳洲幸运5官方开奖结果体彩网:charitable donations or medical expenses, can be subtracted from your AGI after it's been calculated. These are itemized deductions and are listed on Schedule A and reported on Form 1040.

Medical expenses must exceed 7.5% of your AGI to qualify for the deduction. Deductions for cash contributions to charities are generally limited to 60% of your AGI but 20%, 30%, or 50% may apply in some cases.

The total amount of these deductions will likely determine whether you use the standard deduction or 澳洲幸运5官方开奖结果体彩网:itemize your deductions.

The Standard Deduction

The standard deduction is available to all taxpayers and differs according to filing status. You can take the standard deduction or itemize your deductio✨ns. Most people go the route that reduces their taxable income the most. If your itemized deductions (like medical expenses, charitable contributions, etc.) exceed the standard deduction, you may benefit from itemizing, which could further reduce your taxable income.

Here are the 澳洲幸运5官方开奖结果体彩网:standard deductions for tax years 2024 and 2025:

Calculating AGI

Start with your gross income to figure out your AGI. Your gross income is all the money you've earned during the 澳洲幸运5官方开奖结果体彩网:calendar year. Now subtract all qualified de🐎ductions that the IRS allows. The r🌃esult is your AGI.

Your deductions are estimated and listed whe🔯n you file your tax return. Above-the-line deductions are listed on Schedule 1 and reported on Form 1040. Itemized deductions are listed on Schedule A and are also reported o🥀n Form 1040.

Net Income vs. AGI: Key Differences

• Net Income: Used for both individuals and businesses. For individuals, it refers to take-home pay after deductions. For businesses, it refers to profit after expenses and taxes.
• AGI: Exclusively used for individual tax returns and calculated by subtracting certain IRS-approved deductions from gross income. It’s crucial for determining taxable income and eligibility for tax credits.

If you have a business as a sole proprietor or independent contractor, your profits and losses are reported on 澳洲幸运5官方开奖结果体彩网:Schedule C and attached to Form 1040.

The Bottom Line

Net income and adjusted gross income play key roles in understanding your financial situation, but they serve different purposes. Net income is what you take home after deductions, while AGI is used to determine your tax liability and eligibility🍸 for certain credits and deductions.

When preparing your taxes, it's important to understand both figures. AGI is the starting point for calculating your tax bill, while net income helps you understand your actual take-home pay.