Consumers utilize figures for their income and earnings when applying for credit, buying a house or calculating tax payments and refunds. Using the wrong income calculation can prevent approval of a mortgage or other loan, and it might result in errors on taxes and other forms. Understanding the difference between your salary and your adjusted gross income, or AGI, can help you choose the best income figures for different financial scenarios.
When you think of your income, you probably think of your total salary. Salary is total wages paid from an employer or self-employment. This gross earnings figure does not reflect factors such as taxes, deductions, or income from sources other than your job.
Adjusted gross income represents your total income after it has been adjusted for taxes and other deductions. For many people, AGI includes not only salary but also income from sources such as investment earnings or alimony, as well as deductions from taxes, child support or alimony paid to others.
Your salary is probably fairly simple to calculate. Simply look at your pay stub to find your gross or pre-tax pay rate, then multiple this by the number of pay periods in a year to determine annual salary. You can also ask your employer or consult your employment agreement to find this information. To calculate AGI, add your salary to your other sources of income, then subtract deductions or allowances. Lenders and creditors have their own formulas for calculating AGI, though many follow the guidelines in IRS Form 1040. To calculate your AGI based on these guidelines, add your salary, investment income, business income, and alimony payments received to determine your gross income. Subtract deductions listed on the IRS 1040 from this gross income to find adjusted gross income. These deductions include investment contributions, taxes paid and alimony paid. They do not include the standard or itemized deductions taken from AGI that are used to calculate taxes.
Your salary is a useful piece of information for basic financial estimates, such as evaluating job offers or assessing your overall financial health. For example, you may use salary figures when making ballpark estimates about how big a mortgage you can afford. The IRS uses AGI when calculating your tax payments or refund, and creditors use AGI when determining whether you qualify for a loan. You may also use AGI when applying for certain student loan programs or government assistance programs.
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