What is the difference between gross income and taxable income?

Gross income is your total income from all sources before any deductions. Taxable income is the portion of your gross income that is actually subject to tax after all allowable deductions (like the standard deduction or itemized deductions) and exemptions have been applied. Taxable income is almost always lower than gross income.

How does gross income affect my eligibility for a mortgage?

Mortgage lenders use your gross income to calculate your debt-to-income (DTI) ratio, which is a key factor in determining your borrowing capacity and loan approval. A lower DTI (meaning your gross income is high relative to your debt payments) generally makes you a more attractive borrower and can help you qualify for better loan terms.

Are pre-tax deductions like 401(k) contributions included in gross income?

Yes, contributions to pre-tax retirement accounts like a traditional 401(k) or IRA are initially part of your gross income. They are then deducted from your gross income to arrive at your Adjusted Gross Income (AGI), which reduces your taxable income. However, they are still considered part of your total earnings when calculating your overall gross income.

Is unemployment income considered gross income?

Yes, unemployment benefits received from state programs are fully taxable and must be included in your gross income when you file your federal income tax return. You will typically receive a Form 1099-G detailing the amount of unemployment compensation you received during the year.

How can I find out my gross income for the year?

For employees, your gross income is typically found in Box 1 of your W-2 form. If you have multiple W-2s, sum the amounts from Box 1 of each. For self-employed individuals, it's the total of all gross receipts from your business activities. You'll also need to add any other income sources like interest, dividends, or rental income.

Does gross income include non-cash benefits?

Generally, yes. If you receive non-cash benefits that have a monetary value, such as a company car for personal use or certain fringe benefits, their fair market value is often included in your gross income and reported on your W-2. However, some fringe benefits, like health insurance premiums paid by an employer, are typically excluded from gross income.

Why do some financial aid applications ask for my gross income while others ask for AGI or MAGI?

Different financial aid programs and government benefits use various income metrics to determine eligibility. Gross income provides the broadest picture of your total earnings, while AGI and MAGI account for certain deductions, aiming to reflect your financial need more accurately. Always use the specific income figure requested by the application.

Gross Income Explained: Your Personal Finance Guide | One…