What is the Difference Between Taxable Income and Adjusted Gross Income?

The difference between taxable income and adjusted gross income (AGI) lies in the deductions and adjustments made to your income. Here's a breakdown of the two concepts:

• Gross Income: This is the total amount of money you earn or receive in a year, including wages, salaries, bonuses, capital gains, and income from investments, rental properties, and business profits. It represents your pre-tax earnings.
• Adjusted Gross Income (AGI): AGI is calculated by subtracting certain deductions and adjustments from your gross income. These deductions include contributions to traditional 401(k) retirement accounts, student loan interest, and educator expenses. AGI is used as the starting point for calculating taxes and determining your eligibility for certain tax credits and deductions.
• Taxable Income: Taxable income is your adjusted gross income less any itemized deductions or standard deductions you're entitled to claim. It represents the portion of your income that's subject to taxation. Tax brackets and marginal tax rates are based on taxable income, not gross income.

In summary, gross income is the total amount of money you make before deductions and taxes, AGI is your gross income minus certain deductions and adjustments, and taxable income is your AGI minus itemized or standard deductions. Understanding these concepts is crucial for accurate financial planning and tax preparation.

Comparative Table: Taxable Income vs Adjusted Gross Income

The difference between taxable income and adjusted gross income (AGI) can be summarized in the following table:

In summary, gross income represents the total amount you earn before deductions and taxes, while adjusted gross income is your gross income minus specific deductions. Taxable income is the portion of your adjusted gross income that is subject to taxation, after accounting for itemized or standard deductions.