Difference Between Taxable Income and Adjusted Gross Income

Taxable income and adjusted gross income are two very similar terms but there are also a few key differences between them. It is recommended to be familiar with these two terms if you are looking to perform any tax calculations. Despite their different definitions, some people get extremely confused when they have to calculate income tax payable at the end of a financial year. In most parts of the world, income tax is directly proportional to income. Increased income means higher taxes up to a certain limit. The taxation agencies are responsible for computing the income tax after subtracting any tax deductions (expenses made to generate income) and other similar deductions. There are some types of income that are exempt from tax.

Taxable income is the sum of all income to determine the tax payable by a company or an individual. Adjusted gross income is the table income minus certain items. Adjusted gross income is almost always more than your taxable income.

Instructions

  • 1

    Taxable income:

    Taxation officers are required to compute the taxable income for the purpose of determining income tax. For this purpose, all incomes are typically added up. No matter what the source of the income is, the taxation office will take the sum of all your income to calculate the final income tax.

    After calculating the total income (sum of all income) the taxation officer takes into account the deductions and expenses which were made as part of generating income. Depending on the country you reside in, the deductions or expenses are subtracted from the net value to give a figure which will be used to find tax at rates defined by the federal government.

    Large companies and even small scale businesses enjoy the luxury of paying reduce income tax as the investments and operational expenses are subtracted from the total value to arrive at taxable income. Expenses such as interest on home loans, business loans and education of children are also deducted from taxable income.

  • 2

    Adjusted gross income:

    As discussed before, adjusted gross income is always more than your taxable income. Some specific items are subtracted from net income to determine the adjusted gross income. Income tax is calculated by taking into account the adjusted gross income and not the taxable income. Profits made from selling or renting property, cars and other similar objects fall under this category.

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