What is the difference between taxable income and adjusted gross income?

When doing your taxes, you will find that there is a difference between taxable income and adjusted gross income. Understanding the difference can be useful in various areas. For instance, if you are applying for a loan or for certain kinds of benefits, they may want your adjusted gross income. So, if you supply the wrong amount, you can risk being denied for the loan or benefit.

Taxable income encompasses all your earnings. This means all the income you received for the entire year. This income can be from earning wages, social security, and any other source of income. Any source that generates money paid to you is included in your taxable income. So, if you work and earn tips or bonuses, they are included as well. It is basically a total of every source of income. However, this is generally not the amount of money you will be taxed on because you still have deductions that will be subtracted from this amount.

Adjusted gross income is your taxable income minus any deductions. This is where you get to take credit and apply it against your taxable income. There are standard deductions that are applied first. This means that there is a generic amount of money that you can subtract from your taxable income. This reduces the amount of money you have to pay taxes on. However, some people choose to do an itemized deduction. This is appropriate when your itemized deduction amount will exceed your standard deduction. So, if you have a lot of mortgage interest and medical expenses (just to name a few), you may get a larger amount than the standard deduction. This means you have to pay taxes on a smaller amount of your income.

So, when you are planning to do your taxes, know that you have to report every kind of income you received during the year. This is your taxable income. Then, you have to take a look at things you have paid for throughout the year that could be used as a deduction against your taxable income. When you subtract the two, that is your adjusted gross income.