Adjusted Gross Income vs. Taxable Income

Difference Between Taxable Income and Adjusted Gross Income March and April, these are difficult times for the tax…

Difference Between Taxable Income and Adjusted Gross Income

March and April, these are difficult times for the tax payers. Those who are confused between taxable Income and adjusted Gross Income can be found scratching heads and biting nails.  Don’t blame them, these two terms are most important to calculate taxes. However, even they are unable to understand the difference between the two.

To understand the difference between these two highly critical terms, read on.

Taxable Income:

Make a list of all the incomes and the sources they come from. Also, list down all the expenses and deductions allowed as per the income tax rule of your country. Subtract it from the total income. If you are a business man, you need to subtract all the expenses made for business from the income. The rest is your taxable income.

Adjusted Gross Income (AGI)

For instance, if you have rented out a flat or made an investment to retirement plan, add it to your taxable income. Then, go the income tax rules and regulation where you can find some specific mentions with which you can get some rebate to reduce your taxable income. After subtracting these privileges from the taxable amount, you get AGI. Some of the items which can be added in the taxable income are listed below:

  1. HSA Deductions
  2. Some conveyance expenses
  3. Retirement plans
  4. Withdrawal from saving accounts
  5. Educational loan or Interest paid on loan
  6. Business expenses listed in income tax rule 21

The Differences between taxable income and Adjusted Gross Income

  • Both are used to calculate income tax
  • Standard or personal deductions are done in the income coming from all sources to arrive at AGI.
  • AGI will be always more than taxable income.
  • The taxable income should be calculated on the base of AGI.

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