Having discussed what a gross salary is and how important it is for an employee to distinguish between a gross salary and net salary, let’s consider everything about adjusted gross income and gross income.
Understanding the difference between adjusted gross income and gross income is essential for tax purposes as they are considered important concepts in taxation. This helps in calculation and planning respectively.
What is Gross Income?
Gross income by definition is the total income earned by an individual or business from various sources, which includes salaries, wages, tips, dividends, interest, and capital gains. Simply put, gross income is the income before any deductions.
What is Adjusted Gross Income?
AGIis different from gross income in that it is described as gross income minus certain deductions and exemptions. These deductions in AGI may include charitable donations, mortgage interest, and medical expenses. It is that income that is subject to taxation.
Now, let’s examine the difference between GI and AGI by using a regular Nigerian employee.
Bola is a Human Resources professional who earns N5 million per year.
She also earns N1 million in interest from her savings account. Additionally, she donates N200,000 to charity and pays N500,000 in mortgage interest.
Gross income = N5 million (salary) + N1 million (interest) = N6 million
AGI = N6 million
(Gross income) – N200,000 (charitable donation) – N500,000 (mortgage interest) = N5.3 million
From the illustration of Bola’s earnings, her gross income is N6 million, while her AGI is N5.3 million. The difference between the two is the result of the deductions applied to her gross income.
Understanding the Difference Between Gross Income and Adjusted Gross Income
Understanding the difference between gross income and AGI is critical for tax calculation and planning. This concept helps both individuals and businesses to optimise their tax strategies and minimise tax liabilities. Both gross income and adjusted gross income are considered two important concepts in taxation. Adjusted gross income is crucial in determining tax liabilities for businesses and individuals. An AGI that is lower can result in a tax liability that is lower as well. This way, businesses can save money. It is therefore essential to take advantage of all eligible deductions and exemptions to minimise AGI and reduce tax liabilities.
Conclusion: AGI and Gross Income
In conclusion, while tax planning is salient, understanding the difference between gross income and adjusted gross income can also help businesses to make informed decisions.
For individuals, AGI can help them determine the amount to invest or save, while for businesses, adjusted gross income can serve as a means of making informed decisions about investments and expansions.
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