Several times you've heard people, mainly accountants, while calculating taxes, using the terms 'gross profit', 'net income', 'gross annual income', etc. Many, who do not come from an accounting background, do not follow these terms. They keep wondering what it is. So, here is a simple explanation of what it really means.
When you get your salary, you will notice that the word gross income is mentioned in your pay slip. It is the total amount that you make before all the taxes have been deducted. It can also be called gross profit.
In other words, you can also say that it is the sum total of all the income that a person or company makes. The source of the income, is not that important.
The various things this income usually includes are:
- Any gains that you or the company has derived after making dealings in property
- Any income related to decedent
- Any income from life insurance
- Income from endowment contracts
- Income from any interest in an estate or trust
- Some sort of compensation for any services which includes fees or commissions or fringe benefits
- The gross profit that has been derived from business
- The gains derived from any dealings in property
- Separate maintenance payments
Many people do not know the difference between gross and net income. Now, no longer will you be confused between the two. So, net income of a business is what remains from the gross profit, after you have deducted all the costs of the business such as the depreciation, interest, tax deductions, etc.
For a person however, it is simply what remains, after you deduct the allowances and the deductions from the gross profit. This is done to find out what is the amount of income tax the person has to pay.
Gross Annual Income
This is the total gross income that you have made over the entire year. It is your total yearly income before any deductions are done. Suppose, one earns a monthly salary of USD 3000, then his yearly salary will be USD 36000. This is the gross income before deducting all the taxes, and the figure of USD 36000 is his gross annual.
The amount that he will take home by the end of the year after deducting taxes from the gross income, is the total net income.
Adjusted Gross Income (AGI)
The Internal Revenue Service or the IRS uses the AGI in order to find out whether the tax payer is eligible for some of the tax benefits. If you want to know how to calculate the AGI, here's how.
First you have to find out your gross income, and then deduct the qualified deduction i.e., moving expenses, alimony, 50% of the self employment tax, health insurances, interest on student loans, etc., from it. The adjusted income is also called the net income.
If you see the first page of the IRS form 1040 and 104A, you will see that the entire section deals only with the adjusted gross income. Some people tend to confuse AGI with the modified adjusted gross income, which is almost similar to the adjusted profit, except for certain factors which are not included in the former.
They are passive income and losses, student education fees, interest on student loans, taxable social security, etc. Modified gross income is higher than AGI, but always lower than the gross profit.
Now you that are clear as to what is meant by gross income, you will have no trouble calculating taxes or your annual salary. So, next time, when you see the accountant calculating something using terms like gross profit or profit etc, you can join in, and help him too.