Net Income vs. Adjusted Gross Income (AGI): An Overview
All income starts with gross income, which is the total of all the money you make in a year. This includes salaries, wages, bonuses, capital gains, and interest income. But this isn't the money we take home and put into our bank accounts. Our gross income is subject to taxes and often other deductions that reduce gross income to arrive at net income: our take-home pay.
Adjusted gross income (AGI) also starts out as gross income but gross income is reduced by certain adjustments allowed by the Internal Revenue Service (IRS) before any taxes are calculated and paid. One such adjustment is contributions to traditional 401(k) retirement accounts. These contributions reduce gross income and therefore the amount of taxes that are paid.
Key Takeaways
- Gross income is the entire amount of money an individual earns, including wages, salaries, bonuses, and capital gains.
- Adjusted gross income (AGI) is an individual's taxable income after accounting for deductions and adjustments.
- Net income for companies is the profit after accounting for all expenses and taxes. It's also referred to as net profit or after-tax income.
- Net income is used for both businesses and individuals while AGI is only applicable to individuals.
- Adjusted gross income is reported and calculated on Internal Revenue Service (IRS) documents Schedule 1 and Schedule A of Form 1040.
Net Income
Net income is your take-home pay from your job. This is the amount of money that goes into your pocket after everything has been deducted from your gross pay. Your gross pay is the amount of money you receive per pay cycle before any deductions are taken.
Common deductions from your gross income that result in your net income include:
- Taxes, such as your federal, state, local, Social Security, and Medicare taxes
- Pretax deductions, such as health and dental insurance premiums and contributions to company-sponsored retirement plans such as 401(k)s and flexible spending accounts (FSAs)
You can elect to have these pretax benefits deducted from your gross pay. They're deducted before taxes so they reduce your take-home pay which also reduces the amount of taxes that are withdrawn from your paycheck because they're based on this amount.
Net Income for Businesses
Net income is a figure that businesses report on their financial statements, most notably their income statements. Just like an individual's net income, a company's net income is determined by making certain deductions from its gross earnings: its gross sales or revenue. Gross income is the total value of goods and services sold by a company to its customers or clients. These deductions include:
- Cost of goods sold (COGS)
- Operating expenses
- Interest expenses
- Taxes
Adjusted Gross Income (AGI)
AGI is gross income that is adjusted through qualified deductions that are permitted by the IRS. These deductions reduce an individual's gross income, thus reducing the taxes they must pay.
A single individual with a gross income of $110,000 in 2024 would be in the 24% tax bracket on the portion of that income over $100,525. If that figure was reduced in ways permitted by the IRS, it might result in an AGI of just $98,000. Their top dollars of income over $47,150 would therefore fall into the 22% tax bracket. None of their income would reach the 24% bracket level of $100,525. The individual would now pay 22% tax on their highest dollars of income instead of 24%.
Your AGI is probably the most important figure on Form 1040 because it's the benchmark used by the IRS to determine how your taxes are processed, how much tax you owe, and your eligible benefits. Items eligible to be deducted from gross income to arrive at their AGI include:
- Self-employed individuals can deduct several expenses, including health insurance premiums and half of the self-employment tax.
- Those who make contributions to individual retirement accounts (IRAs) 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 Form 2106.
- Those investing in a Health Savings Account (HSA) can deduct that cost.
- The interest on student loans is tax deductible although the principal balance is not.
Eligible educators can deduct up to $300 of unreimbursed expenses.
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 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. These deductions likely determine whether you use the standard deduction or itemize your deductions.
Calculating Adjusted Gross Income (AGI)
Start with your gross income to figure out your AGI: all the money you've earned during the calendar year. Now subtract all your qualified adjustments. The IRS allows for specific deductions to be taken from your total gross income.
These deductions are estimated and listed when 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 on Form 1040.
Alimony is no longer an allowable deduction to be used in the calculation for adjustable gross income after Jan. 1, 2019.
Key Differences
Net income is a term that's used for both individuals and businesses. AGI is a term that's used only for individuals, not for businesses. It is used only on individual tax returns.
Your profits and losses are filled out on Schedule C and attached to Form 1040 if you have a business as a sole proprietor or independent contractor.
What's the Difference Between Gross Income and Adjusted Gross Income?
Gross income is the starting point of all the money you make, including salary, wages, bonuses, and capital gains. This is different from adjusted gross income. AGI is calculated by subtracting any qualified deductions from your gross income. These deductions include things like student loan interest and educator expenses. Adjusting your gross income reduces the amount of tax you pay.
Is Net or Gross Income Higher?
Gross income is always higher than net income. Gross income is the total amount of money you earn before any deductions are made. Net income is your take-home pay. It's what is left over after any taxes and other elective deductions are subtracted from your paycheck, such as retirement plan contributions, health and dental premiums, and other benefits.
What Is the Meaning of Annual Net Income?
Annual net income is the money you take home in a year after all deductions have been made, including taxes, contributions to retirement plans, and healthcare costs.
How Is Adjusted Gross Income Calculated?
Start with your gross income (all the money you earn within a year) and subtract all qualified deductions to arrive at your adjusted gross income. These deductions can be found on your completed Schedule 1 of Form 1040.
The Bottom Line
Income is the amount of money you receive from various sources, including employers, for services rendered. There are different categories of income, such as net and adjusted gross income.
Net income generally refers to your take-home pay or the amount of money left over after all taxes and deductions are taken from your paycheck. Don't confuse this with your adjusted gross income, which is the income that's calculated on your annual tax return after accounting for qualifying tax deductions. This figure is the starting point for calculating your tax liability and determining if you're eligible for certain tax credits and other benefits.
