Net Income vs. Adjusted Gross Income (AGI): An Overview
Adjusted gross income (AGI) is often referred to as "net income," although the two are not necessarily the same thing. Net income is a catch-all phrase generally meant as "aftertax" income, while AGI is the total taxable income—that is, the taxable amount of your income remaining after deductions and other adjustments on the Form 1040.
- Net income is profit a company generates after accounting for all expenses and taxes—also called net profit or after-tax income.
- Adjusted gross income (AGI) is an individual's taxable income after accounting for deductions and adjustments.
- Net income is used for businesses, while AGI is not—it's only used on individual tax returns.
Businesses have to report income just like individuals, but their deductions are different. The following formula is used to calculate the net income for a business:
- Net income = total revenue - cost of goods sold (COGS) - operating expenses - interest expense - non-cash operating expenses + non-operating income - taxes
Adjusted Gross Income (AGI)
AGI is probably the most important figure on Form 1040 since it is the benchmark number used by the Internal Revenue Service (IRS) to determine how your taxes are processed, how much tax you owe, and your eligible benefits.
The first page of Form 1040 is designed to help figure out AGI. For 2019, your final AGI number appears on line 8b.
To figure out AGI, start with your gross income, or all money you've accrued during the course of the calendar year, and subtract all qualified adjustments. The IRS allows for specific deductions to be taken from your total gross income.
These deductions are estimated and listed when you file your taxes. Most deductions, or the "above-the-line deductions," are listed on Schedule 1 and reported on Form 1040. Itemized deductions, which may not apply to every person, are listed on Schedule A and also reported on Form 1040.
Net income also has a specific meaning for businesses; AGI does not. AGI is used only on individual tax returns. In other words, someone might correctly refer to net income and mean the same thing as AGI.
Another person might correctly refer to net income as the total amount of money left after taxes have been paid. It all depends on the context.
The standard above-the-line deductions can take a while to sort through, but it is well worth taking advantage of every tax break you can find.
The following deductions, reported on Schedule 1, can apply to any qualifying taxpayer:
- Self-employed individuals can deduct several expenses, including health insurance premiums and half of the self-employment tax.
- Those who make contributions to individual retirement accounts (IRAs) and qualified retirement plans.
- Reservists, qualified performing artists, and government workers paid on a fee-basis may claim certain business expenses via Form 2106.
- Those investing in a Health Savings Account (HSA) can deduct that cost.
- Those who contribute to qualifying retirement accounts or withdraw qualifying funds may take a deduction.
- Alimony, but not child support, is often tax-deductible.
- The interest on student loans, but not the principal balance, is also tax-deductible.
- Schedule C and F business deductions can be taken out, as can losses on investment assets.
- Teachers for grades K-12 can deduct up to $250 in expenses for books and supplies purchased for their classes.
It is worth noting that the deduction for moving expenses, once permissible for those who moved because of a new job at least 50 miles from their old home, is now only available to active members of the military who are moving due to a permanent change of duty station.
Below-the-line deductions, such as charitable donations or medical expenses, can be subtracted from your AGI after it has already been calculated. These deductions are listed on Schedule A and reported on the 1040.
However, for 2019, medical expenses must exceed 10% of AGI to qualify for the deduction. In addition, deductions for cash contributions to charities are generally limited to 60% of AGI. These deductions likely determine whether you use the standard deduction or itemize your deductions.