A taxpayer’s gross income is the sum of all of the taxpayer’s income from all sources, minus a few items that are exempt from taxation. Once a taxpayer has calculated their gross income, however, they can remove some additional sources of income from their income calculation. The figure that results from these removals, or “adjustments,” is the taxpayer’s “adjusted gross income.”
The list of income sources that taxpayers can remove from gross income to arrive at their adjusted gross income is contained in the United States Tax Code at 26 U.S.C. § 62. It includes such things as business deductions, certain expenses of military reservists, and certain expenses of schoolteachers.
Gross Income vs. Adjusted Gross Income
Why does the government distinguish between gross income and adjusted gross income? As with all things related to the tax code, the answer is complicated. The basic answer, however, is that the federal government uses adjusted gross income to determine eligibility for certain programs.
The government has determined that some types of income shouldn’t disqualify taxpayers from certain programs. Thus, a taxpayer might have a gross income that would not fall within the income range for a certain program, but the government allows the taxpayer to adjust their gross income by removing certain items from the calculation. The resulting adjusted gross income figure could potentially fall within the program’s range.
Standard and Itemized Deductions
Taxpayers shouldn’t confuse the income adjustments for adjusted gross income with the standard or itemized deductions that reduce a person’s income even further. A taxpayer’s adjusted gross income minus deductions is known as their “taxable income,” and is the figure that is used to calculate the amount of tax owed for the year.