Adjusted gross income (AGI) is a key term in the United States tax system that represents an individual's total income from all taxable sources, minus specific deductions allowed by the Internal Revenue Service (IRS). It is used to determine one's taxable income and the amount of taxes owed.
Two types of tax-sheltered investment returns are:
1. Tax-Deferred Investment Returns: These are investment returns that can accumulate and grow tax-free until they are withdrawn. Contributions to tax-deferred accounts, such as Traditional Individual Retirement Accounts (IRAs) and 401(k) retirement plans, are typically deductible from taxable income, reducing one's current tax liability. However, taxes are eventually paid when these funds are withdrawn in retirement, at which point they are treated as ordinary income.
2. Tax-Free Investment Returns: These are investment returns that are not subject to income taxes, neither during the growth phase nor at withdrawal. Examples of tax-free investments include Roth IRAs, Roth 401(k) retirement plans, and municipal bonds. Contributions to Roth accounts are made with after-tax money, so they do not provide an immediate tax deduction. However, qualified distributions from these accounts, including investment earnings, are tax-free.
The main difference between these two types of tax-sheltered investment returns lies in when taxes are paid. Tax-deferred investment returns postpone taxes to a later date when funds are withdrawn, while tax-free investment returns eliminate taxes altogether on qualified distributions.
What
is adjusted gross income? Distinguish between two types of
tax-sheltered investment returns.
1 answer