Prior to preparing and filing a tax return, do yourself a favor by gaining an understanding of commonly used tax terms including earned income, gross income, adjusted gross income (AGI) and modified adjusted gross income (MAGI). Each of these is used in a different way to determine total taxable income and, ultimately, your total tax obligation based on your net income for the year. The distinctions between earned income and gross income are especially important to understand in relation to tax accounting.

Earned Income

According to the U.S. Internal Revenue Service (IRS), earned income includes only certain earnings over the course of any given year. These specific income items include your wages or salary, commissions and bonuses, as well as business income net of expenses if you are self-employed. Earned income may also include the fair market value of certain fringe benefits that are deemed taxable through an employer under the direction of the IRS guidelines, long-term disability benefits received prior to minimum retirement age and strike benefits from involvement in union activities. Earned income does not include the same media of income that are accounted for under the purview of gross income.

Gross Income

Gross income is defined by the IRS as all facets of income you have received throughout any given year. In addition to the specific items listed under earned income, your gross income also includes investment income in the form of interest and dividends, as well as your retirement income derived from retirement account withdrawals. Additionally, gross income includes Social Security benefits, as well as Social Security disability benefits, unemployment payments, alimony and child support. Gross income is considered total income for the purpose of tax preparation and filing, and it is used to further determine total tax liability. This figure is also the starting point for calculating adjusted gross income, which is your income after deductions, and modified adjusted gross income, which is similar to adjusted gross income but with certain deductions added back to the total.

The IRS uses your earned income total to determine whether certain financial actions can be taken throughout the year. For instance, you can contribute to an individual retirement account only if you have earned income for the year, and that contribution may not exceed your total earned income for that year. Your gross annual income is used to determine what deductions, exemptions and credits are available to you to determine your total taxable income and then your total tax obligations for the year.

Earned income, gross income, adjusted gross income and modified adjusted gross income provide the foundation for tax preparation and filing. The difference between earned income and gross income is an important one in your tax accounting.

  1. What is the difference between taxable income and gross income?

    Understand the basic differences between the terms gross income and taxable income, and what is included in the total of ... Read Answer >>
  2. What is the difference between comprehensive income and gross income?

    Learn the specifics of both comprehensive income and gross income, how they are legally defined, and the primary difference ... Read Answer >>
Related Articles
  1. Taxes

    How to Reduce Risk With Tax Diversification

    Is your retirement income adequately diversified from a tax standpoint?
  2. Personal Finance

    Good News! Americans Are Earning More

    After years in the doldrums, incomes are up – and not just for the 1%. Here's who's benefiting.
  3. Taxes

    How To Calculate AGI For Tax Purposes

    Determining your adjustable gross income is essential in the tax filing process. Here are some tips for doing so.
  4. Taxes

    How Getting A Raise Affects Your Taxes

    Many people think they may actually make less overall because they are paying more taxes.
  5. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  6. Managing Wealth

    Increase Your Disposable Income

    Here are four quick and easy ways to up your spending money.
  1. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  2. Gross Income

    1. An individual's total personal income, before accounting for ...
  3. Adjusted Gross Income - AGI

    Adjusted gross income (AGI) is a measure of income calculated ...
  4. Income

    Income is money that an individual or business receives on a ...
  5. Future Income Tax

    Income tax that is deferred because of discrepancies between ...
  6. Taxable Income

    Taxable income is the amount of income used to calculate how ...
Hot Definitions
  1. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  5. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  6. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
Trading Center