A person’s gross income is the total of all their income from any source, minus a certain few exemptions. After determining the person’s gross income, certain deductions can further be made to reduce the income that will be subject to taxation. Once the allowable deductions have been removed from the gross income, this is now the person’s adjusted gross income.
The US Tax Code provides a comprehensive list of what can be deducted from the gross income in order to make the necessary adjustments, and it is found on 26 U.S.C. § 62.
Gross Income vs. Adjusted Gross Income
The government separates the gross income from adjusted income in order to determine which part of the income of a tax payer is actually subject to tax. The adjusted gross income is also a factor in determining a taxpayer’s eligibility for certain government programs.
A person may have a gross income that would not enable them to qualify for certain government programs, that’s why the government allows for adjustment through certain kinds of deductions. After such deductions are made, the taxpayer may at times be qualified based on the adjusted gross income.
Standard and Itemized Deductions
Income adjustment for adjusted gross income is different from standard deductions or itemized deductions. The adjusted gross income can further be reduced with standard or itemized deductions; and the resulting amount is what will be the person’s taxable income.
In summary, a person’s gross income could be reduced to the adjusted gross income, which can further be reduced through standard or itemized deductions, and the result will be the income that is subject to tax. The tax that the taxpayer needs to pay will be calculated based on this taxable income.