Gross vs. Adjusted Income Taxes and W-2s
Gross vs. Adjusted Income Taxes and W-2s. At the beginning of the new tax season, your employer sends you a W-2, a legal tax document stating your previous year earnings, taxes paid and other income deductions. You are legally required to declare this income with the Internal Revenue Service. While calculating your tax liability, the IRS allows the subtraction of certain portions of gross income to lower your tax burden. This amount becomes your adjusted gross income.
Gross income is all the income you received for the previous year. Wages, interest, dividends, tips, alimony, business income, Social Security benefits and unemployment payments are examples of the type of income included. For example, if you had a full-time job and a part-time job and received alimony payments, all of this is counted as income and included in your gross income total. On 2010's Form 1040, income is recorded on lines 7 though 21, and the total is included on line 22.
IRS Form W-2 is the document used by your employer to inform the IRS how much you were paid for the previous tax year. The form includes wages, deductions for taxes, Social Security and unemployment, and any voluntary deductions you made, such as 401k contributions or medical insurance premiums. Your employer sends one copy to the IRS and another copy to you. Along with the federal copy, you will also receive a second copy for your state taxes, another to use for city or county taxes, if applicable, and one for your personal records. You must attach the federal copy of the W-2 to your federal tax return.
The Internal Revenue Service allows for certain adjustments to your gross income. For example, on the IRS 1040 , adjustments include educator expenses, health savings account deductions, moving expenses, IRA contributions, alimony paid, student loan interest and health insurance deductions if you were self-employed. Each of these deductions will help lower your gross income and decrease your tax liability. On Form 1040, these deductions are recorded on lines 23 through 35 and the total is reported on line 36.
Your adjusted income, also called your adjusted gross income, or AGI, is the total amount of expenses subtracted from your gross income. For example, if your total income on line 22 of 2010's Form 1040 was $50,000 and your total deductions recorded on line 36 are $5,000, your adjusted gross income is $45,000. This amount is recorded on line 37 on the Form 1040. This is the amount on which your tax liability is calculated.
- IRS.gov: Form 1040
- IRS.gov: Form W-2