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What is the difference between AGI (adjusted gross income) and net income?

Modified on: 2018/07/10
A:

Adjusted gross income (AGI) is often referred to as "net income," although the two are not necessarily the same thing. Net income is a catch-all phrase generally meant as "aftertax" income, while AGI is the total taxable income – that is, the taxable amount of your income remaining after deductions and other adjustments on the Form 1040.

Net income also has a specific meaning for businesses; AGI does not. It is used only on individual tax returns.

In other words, someone might correctly refer to net income and mean the same thing as AGI. Another person might correctly refer to net income as the total amount of money left after taxes have been paid. It all depends on context. Think of it as "net income before tax," or AGI, and "net income after tax," or AGI less taxes.

Net Income for Businesses

Businesses have to report income just like individuals, but their deductions are different. Use the following formula to calculate the net income before tax for a business: Total revenue - cost of goods sold - operating expenses - non-cash operating expenses + non-operating income.

Adjusted Gross Income

AGI is probably the most important figure on the 1040, since it is the benchmark number used by the Internal Revenue Service (IRS), to determine how your taxes are processed, how much tax you owe and your eligible benefits.

The first page of Form 1040 is designed to help figure out AGI. Your final AGI number appears on line 37, or line 21 of the Form 1040A version.

Calculating AGI

To figure out AGI, start with your gross income, or all money you've accrued during the course of the calendar year, and subtract all qualified adjustments. The Internal Revenue Service (IRS) allows for specific deductions to be taken from your total gross income. These deductions are estimated and listed when you file your taxes,. Most of these deductions, or the "above-the-line deductions," are listed on Form 1040 between lines 23 and 35. Individualized deductions occur below these but may not apply to every person.

Above-the-Line Deductions

The standard above-the-line deductions can take a while to sort through, but it is well worth taking advantage of every tax break you can find.

The following deductions can apply to any qualifying taxpayer:

  • Self-employed individuals can deduct several expenses, including health insurance premiums and half of the self-employment tax.
  • Those who make contributions to IRAs and qualified retirement plans. 
  • Government workers who are considered fee-based should fill out Form 2106 and report their fee basis.
  • Those who purchase a Health Savings Account, or HSA, outside of a retirement plan can deduct that cost.
  • Individuals who moved because of a new job can deduct the moving expenses, as long as the new home is at least 50 miles from the old home.
  • Those who contribute to qualifying retirement accounts or withdraw qualifying funds may take a deduction.
  • Alimony, but not child support, is often tax-deductible.
  • The interest on student loans, but not the principal balance, is also tax-deductible.
  • Schedule C and F business deductions can be taken out, as can losses on investment assets.
  • Teachers for grades K-12 can deduct part of the expenses for books and supplies purchased for their classes.

Below-the-Line Deductions

Below-the-line deductions, such as charitable donations or medical expenses, can be subtracted from your AGI after it has already been calculated. However, each below-the-line deduction is only allowable if it exceeds a minimum AGI percentage. For instance, medical expenses must exceed 7.5% of AGI to qualify for the deduction. These deductions likely determine whether you use the standard deduction or itemize your deductions.


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