In its simplest definition when it comes to taxes, gross amount means everything, and net amount means everything that counts. Of course, nothing is simple when it comes to taxes and there is a difference between gross and net. The gross amount, as the Internal Revenue Service sees it, is the total income you earn that is potentially taxable. The net amount reflects expenses, deductions and credits subtracted from the gross.
Factoring Earned Income
The income section of Form 1040, U.S. Individual Income Tax Return, records all income that is potentially taxable. It starts with wages, salaries and tips, and for the self-employed, includes all income or loss. Enter your gross receipts from business on Schedule C and then subtract all legitimate business expenses to come up with your net profit or loss that you will enter on your return. If you do come up with a loss from business, then you deduct the loss from your total income.
Include Other Income
Other income reported on 1040 includes capital gains, but also capital losses. Only report the taxable amounts received from Individual Retirement Account distributions, social security benefits, pensions and annuities. The sum of these is labeled your “total income,” but this is not the key number when calculating for tax determinations.
Adjusted Gross Income
For tax purposes, you must determine your Adjusted Gross Income (AGI). This amount is derived by subtracting certain allowable expenses from your total, or gross, income. It is the baseline amount for determining your taxes. Though it’s adjusted with some deductions, it is not the same figure as your net income. Deductions to determine your AGI include educator expenses, qualified moving expenses when the move is necessitated by your job, alimony, tuition and fees, and for the self-employed, one half of self-employment tax and the cost of health insurance. When it's all subtracted from your total income, the result is your AGI. It is important to note, that beginning with the 2018 tax year, many of these deductions have been eliminated with the introduction of new tax reforms in December of 2017. Consult with a qualified tax professional, or familiarize yourself with new deduction eliminations, before you file.
Taxable (Net) Income
Reduce your AGI by itemizing deductions or taking a standard deduction, and the number of exemptions you claim multiplied by the standard deduction amount released by the IRS annually. This is your total “taxable income,” the net amount that establishes your tax rate. You still need to add any additional taxes you owe such as self-employment tax, and subtract any taxes already withheld and credits the government owes you before you reach your final tax figure. It is the taxable income, however, that shows the net amount you earned for the year.
Recent Tax Changes
Because recent tax law changes have done away with certain exemptions and deductions, it is a good idea to do your homework to make sure you are filing your taxes correctly. For example, starting for the 2019 tax season, the IRS plans to unveil a new Form 1040 that combines the three current 1040s into one, more stream-lined form, so the way you are accustomed to filing taxes will likely change. Also, for tax year 2018, taxpayers can no longer claim personal exemptions, however, the standard deduction nearly doubled across the board from 2017 amounts with single filers eligible for a standard deduction of $6,350 in 2017 to $12,000 for 2018. Meeting with a tax professional will prove to be helpful, but you can also check the IRS' website for the most up-to-date information.
- TaxAct: A List of Eliminated Tax Deductions in 2018
- Bankrate: Determining taxable income
- IRS: IRS Working on a New Form 1040 for 2019 Tax Season
- Internal Revenue Service. "Publication 5307: Tax Reform Basics for Individuals and Families," Page 7. Accessed Nov. 30, 2019.
- Internal Revenue Service. "Revenue Procedure 2018-57," Page 16. Accessed Nov. 30, 2019.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 525: Taxable and Nontaxable Income." Accessed Nov. 30, 2019.
Tom Chmielewski is a longtime journalist with experience in newspapers, magazines, books, e-books and the Internet. With his company TEC Publishing, he has published magazines and an award-winning multimedia e-book, "Celebration at the Sarayi." Chmielewski's design skills include expertise in Adobe Creative Suite's InDesign and Photoshop. He holds a Bachelor of Arts in English from Western Michigan University.