Trader Education

What The Heck Is Gross Income Anyways?

Gross Income

Receiving a paycheck is great, but how does one measure their salary income versus what they take home? Gross income explains discrepancies and why they exist.

What Is Gross Income?

Gross Income
Gross Income Helps Determine Tax Bills

Some refer to this measure as gross pay, or pre-tax income. Additionally, other deductions are left out of this amount. Gross income determines the beginning number individuals use when calculating tax burden. Wages, tips, salary, and even dividends are examples of sources of gross income.

Furthermore, businesses use a similar definition. Gross income from operations is simply (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 job location. Tax burdens and cost of living differ with region. For example, if location A has a high cost of living, a worker requires 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.

What Is Not Included In Gross Income?

Income such as rentals or capital appreciation qualifies as gross income, but what are some exceptions?

Certain interest, such as interest from municipal bonds, is not included. Also, certain inheritances, life insurance payouts, and even donations made in specific IRA accounts do not qualify. This is significant as informed persons utilize these non-items in reducing their tax bill as much as possible.

Final Thoughts

Gross income is an important measure as it has implications on job choice, and ultimately quality of life. Careful planning goes into making decisions revolved around gross income. Remember the information presented here, and use smart tactics to maximize realized pay.

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