Is Income Before or After Taxes?
The term "income" generally refers to money you receive during the year such as employment earnings, business profits and gains on the sale of investments. For tax purposes, however, the term can have different meanings that refer to different portions of your earnings. Regardless of how the tax authorities use the term, it almost always refers to amounts you receive before paying taxes.
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Gross Income
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The IRS and federal tax laws provide a broad and high-level definition of what constitutes your gross income. Gross income refers to your total earnings from all types of sources, whether it be employment or investments, that are subject to tax. This is not to say that you will pay tax on your entire gross income, but this number serves as your starting point on a tax return before reducing it for deductions and exemptions. As a general rule, gross income includes everything unless a specific law exempts or excludes it.
Adjusted Gross Income
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When you fill out your tax return, the next step after reporting all sources of gross income is to calculate your Adjusted Gross Income (AGI). Your AGI simply represents your income after claiming specific adjustments to income. Adjustments to your income are essentially deductions that reduce your income subject to tax, but are available to all taxpayers who satisfy each adjustment's specific criteria, regardless of whether they claim the standard deduction or choose to itemize. Common adjustments include student loan interest, the tuition deduction, certain IRA contributions, half of self-employment taxes and the alimony payments you make.
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Taxable Income
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The amount you report in taxable income is one of the most important income numbers on your return since it's the final amount of your income or earnings that the IRS is going to calculate income tax on. You arrive at your taxable income by reducing your AGI by the standard or itemized deductions and the number of personal and dependent exemptions you claim. When you calculate the tax you owe using IRS tax tables, your taxable income number is the figure that you will reference. If you use your gross income or AGI with the tax tables, you will end up paying more tax than you actually owe.
Business Income
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If you are a business owner, then you need to understand the meaning of "business income," which some refer to as net earnings or net income. The concept is similar to an individual's taxable income in that it represents the final amount of your business earnings that may be subject to income tax. To calculate your business income as a sole proprietor, you simply subtract all of your business expenses from your total business revenue on the Schedule C attachment. You then transfer the number to your Form 1040 and include it with your other gross income before you start claiming your personal exemptions, deductions and adjustments to income.
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