Let's break down each of these terms related to personal income and taxes:
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Gross Income: This is the total income earned by an individual before any deductions or taxes. It includes wages, salaries, tips, interest, dividends, rental income, and any other sources of income.
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Adjusted Gross Income (AGI): This is the gross income after taking into account specific adjustments allowed by the IRS. Adjustments can include contributions to retirement accounts, student loan interest, certain education expenses, and health savings account contributions. In essence, AGI is calculated as: \[ \text{AGI} = \text{Gross Income} - \text{Adjustments} \]
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Taxable Income: This is the amount of income that is subject to income tax. It is calculated by subtracting the standard or itemized deductions from the adjusted gross income. The formula is: \[ \text{Taxable Income} = \text{AGI} - \text{(Standard or Itemized Deduction)} \]
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Total Income: This refers to all income received in a year, including wages, tips, interest, dividends, and any other sources of income. In the context of the definitions you've provided, total income would refer to the gross income before any deductions or adjustments.
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Total Income - Adjustments: This is effectively the same as Adjusted Gross Income (AGI), and it represents the income level after removing any specific adjustments allowed by the IRS.
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Total Income - Adjustments - (Standard or Itemized Deduction): This represents the Taxable Income calculated after subtracting both the adjustments and the chosen deduction type.
Here's a summary of the relationship between these terms:
- Total Income / Gross Income → Include all income sources.
- Adjusted Gross Income (AGI) → Total Income - Adjustments.
- Taxable Income → AGI - (Standard or Itemized Deduction).
Each of these calculations is crucial for determining an individual's overall tax liability for the year.
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