Difference Between Earned Income and Adjusted Gross Income

What is the Difference Between Earned Income and Adjusted Gross Income?

Brookline, NH Resident Has Questions

Earned income refers to all of the ways that you get paid throughout the year.  This includes your paycheck, commissions, bonuses and income less expenses for self-employed individuals.  It also includes money earned from investments, interest, dividends, alimony and Social Security.  Adjusted gross income refers to this money less any standard deductions that are available to you.  These deductions, referred to as ‘above the line deductions’, are those that are standard to everyone regardless of whether they are itemizing.

A Brookline resident was looking for a lesson in finance, seeking to know the difference between his earned income and adjusted gross income.

Understanding Adjusted Gross Income

Earned income refers to all of the money that you receive.  This includes money from investments and Social Security, as well as any disability money that you have been paid.  Equally important is your Adjusted Gross Income, which is used to determine how much of your income is taxable.  This number factors in things like the number of above the line deductions, those that are taken before itemizing.

Deductions to Calculate Adjusted Gross Income

These above the line deductions refer to things like HSA deductions, some contributions into individual retirement accounts such as IRA, SIMPLE IRA and SEP-IRA.  School tuition and fees, including student loan interest and losses incurred during the sale of a property are also considered above the line deductions.

Once the adjusted gross income has been calculated, you can then determine whether it makes sense to itemize your additional expenses or take the standard deductions.  An experienced tax preparer can help to find the right way to file for you.

The Brookline resident met with Merrimack Tax Associates.  Not only does he now have a better understanding of how his income is calculated, he also has the tools to file his taxes in a way that would be more beneficial for him.

Adjusted Gross Income, Earned Income, tax deductions, taxes

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(603) 429-2009

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