Gross vs. Adjustment Income

by Alex Burke

U.S. citizens and resident aliens determine whether they need to file federal income tax by using a variety of indicators. The total amount of income, known as gross income, is one of those indicators. Once gross income is determined, the taxpayer then identifies which of the many adjustments he is allowed to take to arrive at his adjusted gross income.

Defining Gross Income

Gross income is the total amount of your unearned and earned income for a tax year. This total is arrived at before any adjustments, deductions or other allowances are taken. The IRS identifies income as being anything you earned in the form of money, property, services and goods that is not tax exempt. Income earned from countries outside the U.S. must also be included. Prize money, jury duty pay, alimony and unemployment compensation are types of gross income that taxpayers may not be aware of.

Self-Employed Gross Income

People who are self-employed in a service business (service businesses do not make products) use the gross receipts they receive from that business as gross income. Self-employed persons involved in the manufacturing of products, mining or merchandising figure their gross income by adding up gross revenue and subtracting the cost of goods sold. Additionally, the self-employed person (no matter what industry she is in) includes all money her business earned from investments and other outside sources or operations in her gross income.

Adjusted Gross Income

Referred to as AGI, adjusted gross income is gross income less amounts identified by the IRS as adjustments (expenses, deductions.) IRS instructions for forms 1040, 1040A and 1040EZ describe the types of adjustments a taxpayer can take when completing his personal income tax forms. Adjustments to gross income help lower the total income used to figure the tax the taxpayer must pay to the federal government.

Adjustments to Income

Adjustments to income can include educator expenses and certain business expenses incurred by performing artists, fee-based local and state government officials and National Guard reservists. Contributions to health savings account plans, mortgage interest, charitable donations, moving expenses incurred when starting a new job or beginning a new business and self-employment insurance deductions are also possible adjustments to gross income. The IRS provides free instructional publications for many of the available qualifying adjustments and offers those publications for viewing or download online. Some of the adjustments may require additional forms to be completed when filing income tax. For example, performing artists, fee-based government officials and reservists must fill out IRS Forms 2106 or 2106EZ to take deductions for expenses.

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