Gross income is a the amount a party earns prior to expenses and taxes. Landlords and lenders use a borrower or tenants gross income as a qualification method to determine whether or not a certain party is a qualified candidate to rent or borrow.
Calculating an individuals gross income can be a long and complicated process at times, since this is certainly no simplified process and the fact that each person’s liabilities and financial circumstances vary. Here in the United States for example, not every party is entitled to the same set of rules and standards when it comes down to calculating and making the correct deductions, in order to determine both gross and net income. For example non resident aliens may have to abide by a certain or even different accounting method vs a resident/citizen, which can alter the figures drastically.
Different Varieties of Gross income
Adjusted gross income is the total income a taxpayer makes deductions that are valid. Gross income is different than net income. While gross income is the total money that comes in the hands of the taxpayer, net income or net profit is the gross income minus expenses.
Not all income is taxable. For example, a certain portion of income made by an individual who is liable for child support payments is not taxable; however, alimony, that is, spousal support, is taxable. Income which is saved in retirement accounts such as 401Ks or other long-term investments are not taxable, depending on the exact investment.
Potential gross income is the property’s combined income from all of the property’s sources (rent collected, washing machine income, and others).
The effective gross income is the rental income minus considerations, such as not being paid on time, vacancy rates and other factors which may alter the actual rent collected by the landlord.
The gross income multiplier is a formula used to determine whether a property’s listing price is worth the purchase. The gross income multiplier is an estimate of the property’s value which is derived from dividing the listing price by the property’s gross rental income.
Exclusions from Gross Income
There are quite a few significant items individuals can exclude from gross income when filing. Some of the major items include the following.
Inheritance & Gifts
Certain Social Security Benefits
Tax Exempt Interest
Life insurance Proceeds
Sources of Gross Income
Capital Gains
Dividends
Alimony
Rental Income
Interest Income
Tips
Example of Gross Income
If a company reported earnings of $250,000 annual revenue and $100,000 was reported as items/goods, the gross income would therefore be $150,000
Another example would be if a certain individual received $1,000 paycheck as a gross amount. After certain deductions and taxes they would end up with a net income earning of somewhere near $800.
