What Is Gross Income?
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Your gross income is the amount of money you earn before anything is taken out for taxes or other deductions. For example, even though your monthly salary might be $3,500, you might only receive a check for $2,500. In that case, your net income would be $2,500, but your gross income is $3,500.
Significance of Gross Income
Gross income is often used by lenders as a guideline for how much they will let you borrow, such as when you're applying for a mortgage. For example, according to Bankrate.com, most lenders won't let you borrow more than 28 percent of your gross income. However, when you're figuring out your personal budget, make sure you don't spend more than your net income. Using budgeting software like Quicken can help you keep your spending in line with your income.
Your gross income has portions taken out for a number of taxes before you get your hands on it. These include federal and state income taxes, which vary depending on how much money you make, and the FICA taxes -- Social Security and Medicare -- which are fixed percentages of your income. Depending on where you live, you might also have to pay local taxes. For example, if you work in Kansas City, an extra 1 percent of your gross income is taken out to cover the earnings tax.
You may also have other amounts taken out from your gross income before you receive a check, depending on the benefits your employer offers. For example, you may pay your health insurance, life insurance or long-term care insurance through your employer, and your employer will deduct those amounts from your gross pay. Contributions to your retirement plan, such as a 401(k) or 403(b), also come out of your gross income.
Other Income Sources
Though it might be only a small amount, you may have more gross income than just your paycheck. Your gross income also includes earnings from rentals, other small business efforts, investments and even the interest earned on your bank account before taxes are taken out, according to the Internal Revenue Code. For example, if you make $100 in interest from your savings account, that's an extra $100 added to your gross income.