What is net income? Gross income? Adjusted gross income?

Income is not just income. Not every dollar makes its way into your pocket. Knowing the difference makes a big difference for planning your spending. Gross income may make it seem like you’re flying high, but “adjustments” show a clearer picture.

Q: What is the difference between gross and net pay?

🥧 Gross income: This is your whole pie — everything that you make (AKA the salary you negotiated that’s printed on your offer letter).

🥅 Take-home pay (net pay): As it sounds, this money actually hits your bank account. This would be your gross income AFTER taxes and benefits are deducted. What would those deductions typically include? 

• Your employer will automatically withhold from your pay deductions like Social Security, Medicare, Federal Taxes + State/Local Income Tax

• The allowances you indicated on your W-4 drive what would be withheld

🍹Refresher… ALLOWANCES are exemptions from paying a certain amount of income tax throughout the year . When you claim (qualify for) one, your employer withholds less taxes from your paycheck.

Is that it? Nope. Tax Season exists because your take-home paycheck was still an approximation of what’s ultimately yours. So you “true up” come tax day. That’s why there’s a thing called Tax Refund (when the approximation took too much from you throughout the year) and Tax Bill (when the approximation took too little and you actually owe more).

💃🏻 Enter: Adjusted Gross Income.

Q: What is Adjusted Gross Income (AGI) and who cares about it?

WHAT IS IT

AGI is your Gross Income (that whole pie…) minus certain deductions. What deductions? For many people, retirement contribution is the biggie but also includes things like interest payments on student loans and health savings accounts (HSA). So if your Gross Income = $100,000 and you contribute $19,500 (maxed it out) to your 401(k), if you’ve no other deductions then your AGI would = $80,5000.

WHO CARES ABOUT IT

The IRS! The AGI is used to calculate your final tax bill. Right now, your AGI is especially important because it’s been used to determine coronavirus stimulus check eligibility. Who else cares? Banks look at AGI to see how much income you actually have available to pay bills and buy things.

HOW DO I KNOW MY AGI

Good news! Come tax time you find your AGI right on your Form 1040 (better known as your Individual Income Tax Return). More good news — it’s smart to know the meaning of AGI but don’t worry about calculating it yourself. Robo tax filers like Turbotax do the math for you!