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 deductions, credits and exemptions depend on gross income calculations?

    Understand what deductions, exemptions and tax credits are dependent on the gross income calculation and how these determine ... Read Answer >>
  2. 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 >>
  3. What is the difference in tax liability between gross income and other kinds of income?

    Find out how the U.S. government taxes worker's earnings, whether it is gross income or income exempted or excluded from ... Read Answer >>
  4. What is the difference between AGI (adjusted gross income) and gross income?

    Find out the differences between your annual gross income and your adjusted gross income, or AGI, both of which are calculated ... Read Answer >>
  5. 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 >>
  6. What is the difference between operating income and gross profit?

    Learn more about the difference between operating income and gross profit, two accounting figures that appear on a company's ... Read Answer >>
Related Articles
  1. Taxes

    What is Gross Income?

    Gross income is an individual’s total income before taxes and other adjustments are considered.
  2. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  3. Taxes

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  4. Investing

    How To Value A Real Estate Investment Property

    Two common methods for real estate valuation are the discounted net operating income and gross income multiplier approaches.
  5. 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.
  6. Taxes

    How Getting A Raise Affects Your Taxes

    Many people think they may actually make less overall because they are paying more taxes.
  7. Managing Wealth

    Increase Your Disposable Income

    Here are four quick and easy ways to up your spending money.
  8. Retirement

    6 Places To Retire For Low Income Taxes

    These states offer unique tax benefits for their long-term citizens.
  9. Financial Advisor

    How Working Longer Impacts Social Security

    A look at the impact of working longer on Social Security retirement benefits.
  10. Investing

    What's MAGI?

    Modified adjusted gross income, or MAGI, is one aspect of a person’s income that is calculated while preparing a tax return.
  1. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  2. Income

    Income is money that an individual or business receives on a ...
  3. Taxable Income

    Taxable income is described as gross income or adjusted gross ...
  4. Net Investment Income (NII)

    Net investment income is income received from investment assets ...
  5. Annualized Income

    An estimate of the amount of money that an individual, business ...
  6. Factor Income

    Income received from the factors of production – land, labor, ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center