Taxes: Gross Amount vs. Net Amount

by Tom Chmielewski

In its simplest definition when it comes to taxes, gross amount means everything, and net amount means everything that counts. Of course, nothing is simple when it comes to taxes. The gross amount, as the Internal Revenue Service sees it, is the total income that is potentially taxable. The net amount reflects expenses, deductions and credits subtracted from the gross.

Earned Income

The income section of Form 1040, U.S. Individual Income Tax Return, records all income that is potentially taxable. It starts with wages, salaries and tips, and for the self-employed, includes all income or loss. Enter your gross receipts from business on Schedule C and then subtract all legitimate business expenses to come up with your net profit or loss that you will enter on your return. If you do come up with a loss from business, then you deduct the loss from your total income.

Other Income

Other income reported on 1040 includes capital gains, but also capital losses. Only report the taxable amounts received from Individual Retirement Account distributions, social security benefits, pensions and annuities. The sum of these is labeled your “total income,” but this is not the key number when for tax determinations.

Adjusted Gross Income

For tax purposes, you must determine your Adjusted Gross Income (AGI). This amount is derived by subtracting certain allowable expenses from your total, or gross, income. It is the baseline amount for determining your taxes. Though it’s adjusted with some deductions, it is not the same figure as your net income. Deductions to determine your AGI include educator expenses, qualified moving expenses when the move is necessitated by your job, alimony, tuition and fees, and for the self-employed, one half of self-employment tax and the cost of health insurance. When it's all subtracted from your total income, the result is your AGI.

Taxable (Net) Income

Reduce your AGI by itemizing deductions or taking a standard deduction, and the number of exemptions you claim multiplied by $3,650. This is your total “taxable income,” the net amount that establishes your tax rate. You still need to add any additional taxes you owe such as self-employment tax, and subtract any taxes already withheld and credits the government owes you before you reach your final tax figure. It is the taxable income, however, that shows the net amount you earned for the year.