What is the primary difference between gross income and net income?

The primary difference between gross income and net income lies in the calculations of each term. Gross income represents the total income earned before any deductions are applied. This includes wages, dividends, capital gains, and any other income sources. On the other hand, net income is what remains after all allowable deductions and expenses are subtracted from the gross income. Deductions can encompass a variety of factors, including business expenses, taxes, and other eligible costs.

Understanding this distinction is essential for tax purposes, as it affects the amount of taxable income reported to the IRS. While gross income gives a comprehensive view of total earnings, net income provides a clearer picture of the actual income subject to taxation, after accounting for specific deductions that taxpayers can claim. This differentiation is fundamental in both understanding personal finance and preparing accurate tax returns.