Okay, so how is it adjusted? And how is it gross?
Adjusted Gross Income (AGI) refers to all the money you make that you have to pay taxes on. It includes your salary, bonuses, money you make from mutual fund distributions, your freelance job, that vacation home you rent to the weird woman with the parakeets, and anything else that the IRS (God's financial quarterback) can dip into when it’s time to pony up income tax.
AGI matters at tax time, but it’s also a big deal if you decide to buy a house. Your banker will take a look at your AGI when deciding how much to lend you, so it can decide whether you can afford a fixer-upper with the ten-foot Elvis bouffant on the roof, or the fancy condo with only a modest-sized Elvis shrine. The higher your AGI, the more the bank will generally be willing to lend you.
Related or Semi-related Video
![Finance: What is Ordinary Income v Long-Term Gain Income?](https://media1.shmoop.com/video/thumbnails/COURSE.FINANCE.944_770x433.jpg)
Finance: What is Ordinary Income v Long-...2 Views
finance a la shmoop what is ordinary income versus long-term gain income ah
tax policy it changes like the seasons if the seasons were always mean and [Seasons of the year appear]
nasty well generally speaking throughout modern US tax history there have been
two types of taxes those levied on your wages or personal income that you [US tax types appear]
actively earned usually at a relatively high tax rate and those taxes levied on
gains from investments or passive income you know like stocks that went up and
then we're sold for cash or land that was bought cared for appreciated in [Land stamped with sold]
value and then sold for cash well the two big keys in differentiating these
concepts revolve around a the type of income that's coming in I heat if you
hauled bricks to earn the money it's ordinary actively earned income [Bricks land into wheelbarrow]
plain-vanilla work-related and be that money can be made from investment gains
and there's a curveball here in that if the gains were realized or the [Man hit by a baseball]
investment was turned into profits in the form of cash I eat you sold the land
for cash not in barter for another piece of land and you did it in less than one
year after buying it well then the tax rate applied will be the ordinary income [Tax rate table appears]
level the higher level in part because well if you turned it into profits so
quickly well the government figures it was kind of your job and you were
working it pretty hard in that less than one year time period and so you actively
earned the money and to punish you for working hard they tax you at a higher
rate like the brick hauling ordinary income is earned rather than passive [Bricks falling and dollar signs appear]
long term investing gains the differences can be massive in a blue
state the marginal ordinary income rate post Trump hovers somewhere a bit beyond [Blue states appear in US]
50 percent assuming no incremental city tax piled on top hello Manhattan we're
looking at you the long-term gain rate hovers around 25 percent and in a red
state with a no state tech long-term gain hovers around 20 percent and change
there's Obamacare thrown in there so on and so if you had a gain of a
million bucks on a security you've held 364 days and you sell it that day while
you keep a bit less than 500 grand if you wait another day or two before
selling while you keep more like 750 grand from that million yeah it's a
delta of a quarter of your entire investment courtesy of qualifying for
long-term gain treatment rather than short-term so just like the conclusion [A corvette appears]
of a really good Saturday night you always want to try to go long-term in
instead of short
Up Next
What is the difference between progressive and regressive taxes (flat tax vs. marginal tax)? In the most basic sense, progressive taxes affect the...
What is the difference between taxable and untaxed returns? Not all returns and investments are taxed. Some of these can be considered nontaxable i...
When you realize a gain or loss, it means that you turn an investment into cash. Thrilling, we know.
Time to learn about the IRS. On the bright side, it'll be less painful than an STD, less emotionally manipulating than PMS, and less time-consuming...