Gross vs. Taxable Income: What’s the Difference?

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Table of Contents

Introduction
Discussion
Conclusion
Reference

Introduction

It is frequently challenging to determine the effectiveness of a company’s operations. In order to achieve this, various parameters and complex means of calculation are applied. Gross income and taxable income are concepts that most people may not really understand unless they are versed in finance or tax.

Discussion

It is essential to emphasize that taxable income is any profits assessable to tax, charged (paid, provided) in favor of the taxpayer during the tax reporting period (Doerrenberg et al., 2017). Gross income is the total revenue received by the organization as a result of its activities, but from which no taxes are deducted. The most straightforward method to describe to a person unaccustomed to the differences or concepts of gross income and taxable income is to use the payroll as a guide. By adding back any deductions from the net pay, or amount that was actually paid, gross income can be reached.

It should be emphasized that gross income includes all income generated by an individual that is not explicitly exempt from tax under the Internal Revenue Code (IRC). However, taxable income is the portion of the gross income available for taxation. A deduction is calculated from your gross income to determine the taxable income (Doerrenberg et al., 2017). Gross income consists of more than just people’s wages or compensation. It also includes alimony, rental income, retirement plans, interest, and dividends, among other sources of earnings. However, gross income, on the other hand, is not the same as taxable income. This is because some sources of revenue are not included in people’s gross income for tax reasons. For example, these are life insurance payments, certain social security benefits, and interest on state or municipal bonds (Doerrenberg et al., 2017). Thus, taxable income is now referred to as adjusted gross income (AGI). After the elimination of tax deductions from gross income, individuals and businesses receive exactly AGI.

Hence, gross income is what is considered the starting point for the process of determining tax liability. Gross income pertains to all wages and income that an individual makes; for tax purposes, it applies to each year. Forms of income are wages, tips, self-employment income, salary, unearned income (dividends, interest), and other ways of generating profit for individuals and companies. Also, gross income is often used when applying for a loan because it allows the lender to understand how much profit is available to a person or business (Doerrenberg et al., 2017). Furthermore, the taxable income of a business is all income received after any cost of goods sold is deducted and is found on the income statement. Businesses tend to like to use gross income over taxable income because it helps them gauge what their overall profit is during a period.

Conclusion

It is important to know the differences and concepts of gross income and taxable income because they are used to determine a multitude of items in quite a few different situations. For IRS and tax purposes, I estimate taxable income because it is the income that my tax liability is based on. This is the income that I pay taxes on. I know that anything that I can do to reduce my taxable income means that I will have a lower tax liability. In terms of overall gross income, I evaluate this number as well because it is the total income that I bring in prior to any deductions.

Reference

Doerrenberg, P., Peichl, A., & Siegloch, S. (2017). The elasticity of taxable income in the presence of deduction possibilities. Journal of Public Economics, 151, 41-55.

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Gross vs. Taxable Income: What’s the Difference?

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