Taxable Income vs Adjusted Gross Income
Taxable Income and Adjusted Gross Income are clearly defined terms, yet some people find them to be confusing when it comes to computing income tax that they need to pay for any financial year. In most of the countries, income tax is progressive as tax rate goes up with income up to a certain limit. Any income tax is levied upon a person or a corporation after calculating all the income and then subtracting all the expenses and other deductions. Normally all incomes are not taxed and there are some incomes that are exempt from tax.
Taxable Income
For the purpose of computing income tax, all incomes are added up, whatever source they come from, and then expenses and deductions allowed under the income tax rule of the country are subtracted from the total value to arrive at the amount of money to be taxed at the prevailing rates. In case of business, all expenses borne for business are to be deducted to arrive at taxable income. In many countries, expenses incurred on payment of interest of home loan and education of children is also exempt up to a limit from taxable income.
Adjusted Gross Income (AGI)
Adjusted gross income is always more than taxable income. It is the total income of any individual minus some specific items. When computation of income tax is done, it is not the gross income but adjusted gross income that is looked for. Profit obtained from selling any property is added to other sources of income to arrive at adjusted gross income. These sources of income could be salary, income from business, income from rented property, interest earned from money in banks and all other types of income. In short, adjusted gross income is arrived at by deducing specific items listed in the income tax rule numbering 21 at present. Some of the specified items are as follows.
• HSA deductions
• Some conveyance expenses
• Contributions to retirement plans such as some IRA’s
• Penalties paid for withdrawal from some savings
• Educational fees and interest paid on education loan
• Some business expenses
Difference between Taxable Income and Adjusted Gross Income
› Both AGI and taxable income are nomenclatures of income of an individual or a company and are so labelled to be able to calculate the income tax to be levied on the entity.
› When income from all sources is added up and some specific items mentioned in the taxation laws of a country are reduced from it, we arrive at adjusted gross income. This amount is taken as a base to then arrive on taxable income by adjusting certain deductions, whether standard or personal.
› Thus adjusted gross income is the income which is taken as a standard from which some allowable adjustments are made so as to arrive at taxable income.
› Taxable income is always less than adjusted gross income. To compute income tax of a person or a company, it is vital to first calculate the adjusted gross income.