Gross Income and Taxes: A Complete Guide

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Gross Income
Gross Income Helps Determine Tax Bills

What Is Gross Income?

Receiving a paycheck is great, but how does one measure their salary income versus what they take home? Gross income measures the total amount of money earned over a given period.

Some refer to this measurement as gross pay or pre-tax earnings. This entire amount is not always subject to taxes, certain types of expenses can be deducted. In addition, the IRS offers credits and deductibles that can help reduce taxable income further.

Taxpayers use gross income as a starting point to calculate tax payments and refunds. Wages, tips, salary, and even dividends are examples of taxable income.

Determining gross earnings is simple. Use this formula:

Gross Income = Total Sales – Cost of Goods Sold (COGS)

This is obviously different from an individual’s point of view, however, the point remains that taxes are free from this number.

Uses Of Gross Income

Certainly, this helps workers understand salary requirements. Also, this is especially true when choosing a job location. Tax burdens and cost of living differ with the region. For example, if location A has a high cost of living, a worker requires a higher annual salary, then location B with a lower cost of living. This is because salary does not take into account local and state taxes.

Furthermore, lenders use this measure as guidelines when making loans. This is significant when applying for a home loan, or other sizable life events that require loans.

Exceptions

For example, capital appreciation qualifies as taxable income, but other types of earnings are exempt.

Certain interest payments – such as distributions from municipal bonds – ¬†are not factored into gross income. Certain inheritances, life insurance payouts, tax-deductible donations, and IRA contributions also don’t count. This is significant as informed persons utilize these non-items in reducing their tax bill as much as possible.

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