Difference Between Taxable Income and Adjusted Gross Income

 Taxable Income vs Adjusted Gross Income

Taxation has been practiced in Ancient Egypt starting at around
3000 BC to 2800 BC. In fact, it has been particularly mentioned in the Old Testament book of Genesis. The Persian Empire of 500 BC introduced a regulated tax system while Muslim rulers of India imposed taxation in the 11th century which was later abolished.

Since then it is utilized by governments to generate income to be used for their expenditures. The main purposes of taxation are:
� Revenue, which is to raise money to build roads, hospitals, and to support the military and the government’s legal system.
� Redistribution, which is the transfer of wealth from society’s richer section to its poorer section.
� Repricing, wherein taxes are imposed on products that are harmful to man like tobacco and carbon-based fuels.
� Representation, wherein rulers tax citizens and at the same time citizens demand accountability from their rulers to have better governance.

The taxation imposed on individuals or companies may be a direct tax, which is paid in money, or an indirect tax which is paid in kind or labor. The amount of taxes that an individual or company pays is based on their gross income less deductions.

An individual or a company’s gross income is the amount that is earned before any deductions other than those that are excluded by the Internal Revenue Code. It is a company’s net sales minus the cost of sales. It includes cash, salaries and wages, bonuses, dividends, interests, rents, royalties, pensions, income from a business, income tax refund, and shares from corporations and partnerships. It also includes capital gains and losses.

The taxable income of a company or and individual is derived from gross income minus business expenses and other deductions. It depends upon the income tax system that is used by a specific government or country. There are systems that base their taxation on the current taxable income while others base it on previous periods.
It is any income of a taxpayer like corporations, partnerships, and individuals.

For an individual, it is the income he earned from all sources not only from his salary. In the United States it is called the Adjusted Gross Income (AGI). It is an individual’s income minus personal exemptions and other deductions that have to be itemized. Deductions include personal exemptions and personal deductions like medical expenses and home mortgage interest.

Summary:

1. Taxable income is the income earned by an individual or business entity less expenses and deductions. Adjusted gross income is the taxable income of an individual which includes income from all sources.
2. Taxable income is the basis of the taxes that are imposed on all taxpayers while adjusted gross income is the basis of the taxes imposed on individuals.
3. Both are derived from the gross income of a taxpayer less all allowable deductions. Taxable income allows for deductions from sales and operating expenses of a business or corporation while adjusted gross income only allows for an individual’s personal exemptions and deductions.

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