Man with blue collar shirt using a calculator with a sheet of paper in right hand
Brenda Solorzano
July 15, 2022
2 min

Everything You Need to Know About Gross Income

We've all heard the term "gross income" at some point in our adult lives and although we may have a general understanding, I've decided to write this blog for you to get a better understanding of what it actually means. We'll also look into what it means as it relates to taxes.

Why is it important to know what gross income means?

The whole point of my blog and a big part of my job is to support your financial success!

Knowing what gross income means and how it applies to taxes is important for your continued success because your gross income influences how much you pay in income taxes.

Gross income can also affect your ability to borrow, apply for loans, and get credit.

Knowing what your Gross Income is also helps you understand what you can afford. If you're thinking of buying a home and are looking to apply for a mortgage, your gross income is important so that you know which mortgage you can apply for, and afford because your gross income is how mortgage lenders and landlords determine your financial reliability. More specifically, lenders will want to know what number percentage of your income will be going to a mortgage payment consistently.

Keep reading to learn more about what gross income is and how it influences your taxes, economic growth, and spending possibilities.

What is gross income?

Gross income is the amount of money you're paid and you earn, before any income taxes, payroll taxes, and other deductions are taken out. Gross income it's used to calculate and determine the amount of federal and state income taxes you will be subject to pay on your annual tax return.

Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income.

What is an Example of Gross Income?

Assume you get paid as an employee of a company an annual salary of $1000,000, you generate $5,000 a year in interest from a savings account, and receive $10,000 a year from rental property income. Your gross annual income is $115,500 because that is the total of all the income you generate during the year before taking out any taxes.

What are Sources of Gross Income?

The most typical way of obtaining gross income is from a paycheck, which can be made up of hourly wages, your salary, commission, bonuses, and freelancing. However, gross income can also come from alimony, pension, rental income, and self-employment income. These forms of income that I just listed are only partly subject to taxation. Additional gross income sources that are subject to taxation include:

  • Selling goods online or in-person
  • Business income
  • Gambling winnings
  • Income from discharged debt
  • Income from a decedent or as an interest of an estate or trust
  • Interest from bank accounts, certificates of deposit (CDs), etc.
  • Tips

Some examples of income that is not subject to taxation include:

  • workers' compensation payments
  • life insurance proceeds,
  • inheritance, and
  • municipal or state bonds

Why does gross income matter for my taxes?

  • Gross income is the amount of money you earn before any taxes or other deductions are taken out. Taxable income starts with gross income, then certain allowable deductions are subtracted to arrive at the amount of income you're actually taxed on.
  • It impacts how much someone can borrow for a home and it's also used to determine your federal and state income taxes.
  • Your net income is your income after taxes and other deductions have been withheld. It's also known as take-home pay.
  • Your adjusted gross income (AGI) is your gross income less above-the-line deductions like student loan interest. This is the basis for your income taxes.

Need help figuring out your Gross Income?

If you need to calculate your gross income properly when you file your U.S. tax return as well as all the other deductions, exclusions, exemptions, and credits you are entitled to claim, i can help you with detailed guidance right away. I'm happy to provide detailed, personalized guidance through a one-on-one consultation. You can reserve the best day and time to meet by contacting me to schedule a consultation.

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