Gross adjusted income is a key concept in income tax. When you are computing your tax, this is a concept you must know. Before we discuss what this term means, let us discuss one more term so that this concept is clear.
That term is gross income. This is the total income that you have received in a year from all sources before any deductions have been made[i]. Salary, rent, interest, lottery winning, every source of income is included under gross income.
Gross adjusted income is what you get when you deduct adjustments to income from your gross income[ii]. So, what are the adjustments that you can deduct?
The adjustments also referred to as above the line deductions, are permitted deductions, which you can minus from your gross income. This helps to reduce your gross income thus helping you to save on taxes. The allowed deductions or adjustments are[iii]:
- Individual Retirements Arrangements (IRA): This is a savings arrangement, where you can put some money aside for your retirement. You can set up an IRA with your bank, or any other financial institution. The amount saved (as per IRS norms) can be deducted from your gross income.
- Alimony: Alimony paid to a spouse or former spouse can be deducted from gross income. However, the receiver has to show it as income. Only alimony made under a divorce decree is accepted.
- Deduction for bad debts: A bad debt is a debt or money that someone should pay you and which cannot be collected. This includes business bad debts and non-business bad debts. There are various conditions that need to be fulfilled before you decide an amount is a bad debt.
- Moving expenses: When you move due to a change in your job or business, the expenses spent can be deducted, subject to certain conditions. The new place must be more than 50 miles from your old home, and you must have been employed for at least 39 weeks for the past 12 months.
- Interest on a student loan: You can deduct the interest that you pay on student loans from your gross income. The amount allowed is $2,500 or actual interest, whichever is lesser. The loan can be for you, your spouse or a dependent.
- Tuition expenses: The money spent on tuition and related fees by you, your spouse or a dependent can be deducted from your gross income. There are some conditions that have to be fulfilled to make this claim.
- Educator expense deduction: If you are an eligible educator (teaching kindergarten to Grade 12), you can claim a deduction up to $250.
- Capital gains or losses.
- Income from agriculture or a farm.
- 50% of the taxes paid towards self-employment.
You need to list out all the adjustments or deductions allowed. The total adjustments can then be deducted from the gross salary to arrive at the Gross adjusted income[iv]. You can either choose an itemized deduction or opt for the standard deduction allowed, whichever is greater.
So, Gross adjusted income = Gross income – Adjustments to income
The Gross adjusted income is important because this is the baseline amount. From this amount,you can make deductions for exemptions allowed under the law to compute your taxable income, on which tax is calculated. So finding out the Gross adjusted income is the first step in your tax calculation process.