Gross income is the total amount of money you make in a year. You calculate income taxes based on a figure the Internal Revenue Service calls adjusted gross income. "Adjusted" means you get to reduce your gross income by deducting certain items. AGI is important because it determines things like your tax bracket, eligibility for tax credits and the amount of money you can contribute to IRAs and other qualified savings plans.
Adjusting Your Gross Income
Gross income includes salary and other compensation you receive from jobs. Add capital gains, interest and dividend income to any employment income. Other items included in gross income are taxable distributions from annuities, pensions and IRAs or other tax-deferred savings plans plus items like unemployment benefits, alimony and any taxable portion of Social Security benefits. Earnings from self-employment also go in the pot.
A number of items can be subtracted to reduce gross income. You can deduct student loan interest, moving expenses and alimony paid. If you are self-employed, 50 percent of self-employment tax comes off along with premiums for self-employment health insurance. You may also reduce gross income by the amount of any tax-deductible contributions to IRAs, Simplified Employment Pensions and Savings Incentive Match Plans for Employees. The result is adjusted gross income. You may have other deductions such as charitable contributions or unreimbursed business expenses, but these are written off later in the tax preparation process and do not reduce gross income.