Gross income vs. AGI vs. taxable income
Gross income, AGI, and taxable income each represent a different stage of calculating your taxes. The table below shows how they’re connected and what gets subtracted at each step:
| Term | What it is | How it’s calculated |
|---|---|---|
| Gross income | Your income from all sources that must be included under federal law before adjustments and deductions | Includes taxable wages, investment income, net business income, rents, and other includible amounts |
| Adjusted gross income (AGI) | Gross income minus your above-the-line deductions | Gross income minus adjustments such as eligible student loan interest or deductible IRA contributions |
| Taxable income | The amount used to calculate federal income tax | AGI minus the standard deduction or itemized deductions and other applicable deductions |
Source: Internal Revenue Service (1, 2)
What counts as taxable income
Most money you receive counts as taxable income unless it’s specifically excluded. Common sources include:
- Wages, salary, tips, and bonuses
- Net self-employment and freelance income
- Investment income, including interest, dividends, and capital gains
- Rental income
- Gambling winnings
- Unemployment compensation
What income is usually not taxable?
A shorter list of income is excluded from your taxable income, including:
- Most gifts and inheritances
- Child support payments
- Most life insurance payouts
- Qualified scholarships used for tuition
- Welfare benefits
Some income may be fully or partly taxable. Social Security benefits may be partly taxable depending on your income and filing status. Disability payments may be fully, partly, or not taxable depending on the circumstances.
How to calculate taxable income
You can work out your taxable income in three steps:
- Add your gross income from all sources.
- After accounting for eligible business expenses when calculating net business income, subtract other eligible adjustments to calculate your AGI.
- Subtract your standard deduction or itemized deductions and any other deductions you qualify for.
For example, suppose you had $52,000 in gross income and $2,000 in adjustments:
- First calculate your AGI: $52,000 (gross income) - $2,000 (adjustments) = $50,000
- Subtract the standard deduction: $50,000 (AGI) - $16,100 (single standard deduction for 2026) = $33,900
- Your taxable income is: $33,900
How taxable income affects your tax bracket
Your tax bracket is based on your filing status and taxable income, not your gross pay. Because the tax system is progressive, different portions of your income may be taxed at different rates. Your marginal rate applies to your last dollars of taxable income, while your effective rate is the average rate paid across your income.
Ways to reduce taxable income
Depending on your eligibility, you may be able to lower taxable income by:
- Making pre-tax workplace retirement contributions
- Claiming deductible Individual Retirement Account (IRA) or Health Savings Account (HSA) contributions
- Taking the standard deduction or itemizing, whichever provides the larger deduction
- Claiming other eligible adjustments or deductions
