Net Income vs. Adjusted Gross Income (AGI): What's the Difference? (2024)

Net Income vs. Adjusted Gross Income (AGI): An Overview

All income starts with gross income, which is the total of all the money you make in a year. This includes salaries, wages, bonuses, capital gains, and interest income. As we know from our paychecks, this is not the money that we take home and put into our bank accounts. Our gross income is subject to taxes and often other deductions, which reduce gross income to arrive at net income: our take-home pay.

Adjusted gross income (AGI) also starts out as gross income, but before any taxes are paid, gross income is reduced by certain adjustments allowed by the Internal Revenue Service (IRS). One such adjustment is contributions to traditional 401(k) retirement accounts. This reduces gross income and, therefore, the amount of taxes that are paid.

Net Income

Net income is your take-home pay from your job. This is the amount of money that goes into your pocket after everything is deducted from your gross pay. Your gross pay is the amount of money you receive per pay cycle before any deductions.

Common deductions from your gross income that result in your net income include:

• Taxes, such as your federal, state, local, Social Security, and Medicare taxes
• Pretax deductions, such as health and dental insurance, contributions to company-sponsored retirement plans such as 401(k)s, and flexible spending accounts (FSAs)

You can also elect to have these pretax benefits deducted from your gross pay. Since they are deducted before taxes, it reduces your take-home pay, which also reduces the amount of taxes that are withdrawn from your paycheck.

Net Income for Businesses

Net income is a figure that businesses report on their financial statements—notably their income statements. Just like an individual's net income, a company's net income is determined by making certain deductions from its gross pay, which is its gross sales or revenue. In other words, gross income is the total value of goods and services sold by a company to its customers. These deductions include the:

• Cost of goods sold (COGS)
• Operating expenses
• Interest expenses
• Taxes

Adjusted Gross Income (AGI)

AGI is gross income that is adjusted through qualified deductions that are permitted by the IRS. These deductions reduce an individual's gross income, thus reducing the taxes they need to pay.

For example, an individual with a gross income of $110,000 in 2024 would be in the 24% tax bracket. If that figure was reduced in ways permitted by the IRS, it might result in an AGI of $98,000. The individual would now be in the 22% tax bracket and would pay 22% tax on $98,000 instead of 24% on $120,000.

Your AGI is probably the most important figure on Form 1040 since it is the benchmark used by the IRS to determine how your taxes are processed, how much tax you owe, and your eligible benefits. Items eligible to be deducted from gross income are described as follows:

• Self-employed individuals can deduct several expenses, including health insurance premiums and half of the self-employment tax.
• Those who make contributions to individual retirement accounts (IRAs) and qualified retirement plans can reduce their gross income by the amount contributed, up to yearly limits.
• Reservists, qualified performing artists, and government workers paid on a fee basis may claim certain business expenses via Form 2106.
• Those investing in a Health Savings Account (HSA) can deduct that cost.
• The interest on student loans, but not the principal balance, is tax-deductible.
• Educator expenses are deductible up to $300 a year.

All of these expenses are standard above-the-line deductions that can take a while to sort through, but it is well worth taking advantage of every tax break you can find.

Below-the-line deductions, such as charitable donations or medical expenses, can be subtracted from your AGI after it has already been calculated. These deductions are listed on Schedule A and reported on Form 1040.

Medical expenses must exceed 7.5% of AGI to qualify for the deduction. In addition, deductions for cash contributions to charities are generally limited to 60% of AGI. But in some cases, 20%, 30%, or 50%, may apply. These deductions likely determine whether you use the standard deduction or itemize your deductions.

Calculating Adjusted Gross Income (AGI)

To figure out AGI, start with your gross income, or all the money you've accrued during the course of the calendar year, and subtract all qualified adjustments. The IRS allows for specific deductions to be taken from your total gross income.

These deductions are estimated and listed when you file your taxes. Most deductions, or the above-the-line deductions, are listed on Schedule 1 and reported on Form 1040. Itemized deductions, which may not apply to every person, are listed on Schedule A and also reported on Form 1040.

Key Differences

Net income, as mentioned above, is a term used both for individuals and businesses. AGI is a term used only for individuals, not for businesses. It is used only on individual tax returns.

If you have a business as a sole proprietor, the profit and loss are filled out on Schedule C and attached to Form 1040.

The Bottom Line

Income is the amount of money you receive from various sources, including employers, for services rendered. There are different categories of income, such as net and adjusted gross income. Net income generally refers to your take-home pay or the amount of money left over after all taxes and deductions are taken from your paycheck. Don't confuse this with your adjusted gross income, which is the income calculated on your annual tax return after accounting for qualified deductions. This figure is the starting point to calculating your tax liability and to determine if you are eligible for certain tax credits and other deductions.