Adjusted Gross Income vs Taxable Income: Complete Guide for 2026

Ever stare at your tax forms wondering why there are three different income numbers—and which one actually matters? Don’t worry, we got you. The difference between adjusted gross income vs taxable income confuses everyone at first, but understanding these two numbers is the key to lowering your tax bill.

Here's the thing: your paycheck amount, your AGI, and your taxable income are all different. And knowing which deductions reduce which number can save you hundreds (or even thousands) of dollars. 

If you're a small business owner trying to maximize deductions or filing your own taxes for the first time, getting this right matters. Let's break down what AGI and taxable income actually mean and how they impact what you owe.

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TL;DR: Adjusted gross income vs taxable income explained

Need to understand the difference? Here's the breakdown:

What is adjusted gross income (AGI)?

• Your total income (wages, tips, self-employment, investments—everything you earned)
• Minus specific deductions like retirement contributions, HSA deposits, and student loan interest
• This number comes first and determines whether you qualify for tax credits and other benefits

What is taxable income?

• Your AGI from above
• Minus the standard deduction ($16,100 for single filers, $32,200 for married couples in 2026)
• Or minus itemized deductions if they're higher than the standard deduction
• This final number is what your actual tax bill is calculated on

The key difference: AGI comes first in the calculation. Taxable income comes second. The standard deduction doesn't reduce your AGI—it reduces your taxable income after AGI is already calculated.

What is adjusted gross income (AGI)?

Think of your adjusted gross income as step one in calculating your taxes. It's your total income from all sources—your salary, business profits, rental income, investment gains—minus certain deductions the IRS lets you take right off the top.

So is AGI before or after taxes? It comes before. You calculate your AGI before applying the standard deduction or itemizing, and before figuring out what you actually owe. Your AGI also determines whether you qualify for various tax credits and deductions.

Here are the most common adjustments small business owners use to reduce their AGI:

Self-employment tax deduction: If you're self-employed, you can deduct half of your self-employment tax (the employer portion of Social Security and Medicare taxes).

Retirement account contributions: Contributions to a SEP-IRA, SIMPLE IRA, or solo 401(k) reduce your AGI. For 2026, you can contribute up to $24,500 to a solo 401(k) as an employee ($32,500 if you're 50 or older). Business owners can also make employer contributions on top of this.

Health Savings Account contributions: If you have a high-deductible health plan, HSA contributions reduce your AGI. For 2026, you can contribute up to $4,400 for individual coverage or $8,750 for family coverage, plus an extra $1,000 if you're 55 or older.

Self-employed health insurance: You can deduct premiums you pay for health, dental, and long-term care insurance for yourself, your spouse, and your dependents.

How to calculate AGI

Calculating your AGI is straightforward once you have your documents together:

1. Add up all income sources. Include your W-2 wages if you pay yourself a salary, business income from your Schedule C or K-1, rental income, investments, and any other taxable income.
2. Subtract the adjustments you qualify for. Take all those deductions we just covered—self-employment tax, retirement contributions, HSA deposits, health insurance premiums.
3. The result is your AGI. This number appears on Line 11 of Form 1040. If you're using accounting software or working with Homebase payroll, these calculations happen automatically.

Psst…did you know that Homebase payroll automatically generates your W-2s with all the wage information you need to calculate your AGI accurately? Forget about figuring out what you paid yourself last year—our payroll tool keeps track of it all.

What is taxable income?

Taxable income is what you actually pay taxes on. After you've calculated your AGI, you get to subtract even more—either the standard deduction or itemized deductions—to arrive at your taxable income. This final number is what determines your tax bill.

So is adjusted gross income the same as taxable income? Nope. Your taxable income is always lower because you're taking additional deductions after calculating AGI. Think of it like this: AGI is checkpoint one, taxable income is checkpoint two.

Here are the deductions that reduce your AGI to get your taxable income:

Standard deduction: For 2026, the standard deduction amounts are:

• $16,100 for single filers
• $32,200 for married couples filing jointly
• $24,150 for heads of households

How taxable income is calculated

Here's how to go from AGI to taxable income:

1. Start with your AGI. This is your baseline number after all the adjustments we covered earlier (self-employment tax, retirement contributions, HSA deposits, health insurance premiums).

2. Subtract the standard deduction. For 2026, that's $16,100 if you're single, $32,200 if you're married filing jointly, or $24,150 for heads of households.

3. The result is your taxable income. This final number is what your tax bill is calculated on.

For example:

• You pay yourself a W-2 salary of $80,000 from your business
• You contribute to your solo 401(k): $24,500
• You contribute to your HSA: $8,750
• Your AGI is $46,750 ($80,000 - $24,500 - $8,750)
• Subtract the standard deduction (married filing jointly): $32,200

Your taxable income is $14,550

That's the number your tax bill is based on. By maxing out your retirement and HSA contributions, you've reduced your taxable income to a fraction of your original salary.

AGI vs taxable income—key differences

Here's the simplest way to think about it: AGI comes first, taxable income comes second. Each one gets calculated by subtracting different things.

What reduces your AGI: Business expenses already reduce your business income before it hits your tax return. Then you subtract things like:

• Retirement contributions (solo 401(k), SEP-IRA, SIMPLE IRA)
• HSA contributions
• Self-employed health insurance premiums
• Half of self-employment tax (if you're a sole proprietor)

What reduces your taxable income: After you've calculated your AGI, you subtract the standard deduction. That's it. For most business owners, this is straightforward—just subtract $16,100 (single), $32,200 (married), or $24,150 (head of household) from your AGI.

Why both numbers matter:

• AGI determines eligibility. Many tax credits and deductions have income limits based on your AGI. A lower AGI can unlock benefits you might otherwise miss.
• Taxable income determines your bill. This is the number that determines which tax bracket you're in and what you actually owe.

Remember that Sunday night panic when you're trying to calculate your AGI and can't find half your payroll records? Yeah, we feel you.

Our payroll tracks every paycheck—yours and your team's—so your W-2s show up with the exact numbers you need. No digging through old bank statements at midnight wondering if you paid yourself that bonus in December or January.

Does AGI include the standard deduction? 

No, the standard deduction comes after AGI. You calculate AGI first, then subtract the standard deduction to get taxable income.

Is taxable income after the standard deduction? 

Yes, taxable income is always AGI minus the standard deduction (or itemized deductions if they're higher).

What's the difference between gross income and taxable income? 

Gross income is everything you earned. AGI is gross income minus adjustments. Taxable income is AGI minus the standard deduction. Each step reduces the amount you're taxed on.

Are tax brackets based on AGI or taxable income?

Your tax bracket is based on your taxable income, not your AGI. This is crucial to understand. Your taxable income determines which brackets apply to different portions of your income.

Here's why this matters:

Let's say you're single with an AGI of $60,000:

• Subtract the standard deduction: $16,100
• Your taxable income: $43,900
• Your tax is calculated on that $43,900, not the full $60,000

You don't pay 22% on all your income. Instead, you pay:

• 10% on the first $12,400
• 12% on income from $12,401 to $43,900

The bottom line: Lowering both your AGI and taxable income saves you money. A lower AGI can unlock more tax credits and deductions, while a lower taxable income directly reduces your tax bill.

How to reduce your AGI and taxable income

Reducing both your AGI and taxable income is a smart strategy. A lower AGI unlocks tax credits and deductions that phase out at higher incomes, while a lower taxable income directly cuts your tax bill.

Reduce your AGI

Lower your AGI and you unlock more tax benefits. Here's how:

Max out retirement contributions. Putting money into a traditional IRA or 401(k) reduces your AGI dollar for dollar. For 2026, you can stash up to $7,500 in an IRA ($8,600 if you're 50 or older) and $24,500 in a 401(k) ($32,500 if you're 50+).

Fund your Health Savings Account. HSA contributions reduce your AGI while growing tax-free. For 2026, that's up to $4,400 for individual coverage or $8,750 for family coverage (plus $1,000 extra if you're 55 or older).

Claim above-the-line deductions. Student loan interest (up to $2,500), educator expenses (up to $300), and half your self-employment tax all reduce your AGI before you even get to the standard deduction.

Leverage new 2026 deductions. Qualify for no tax on tips, no tax on overtime, the senior deduction, or car loan interest? These can help reduce your AGI before you even start calculating your taxable income.

Reduce your taxable income

After you've knocked down your AGI, you get another round of reductions:

Take the bigger deduction. Compare your itemized deductions to the standard deduction ($16,100 single, $32,200 married filing jointly in 2026) and claim whichever saves you more.

Itemize if it's worth it. Track mortgage interest, property taxes (up to $40,400 for 2026), charitable donations, and medical expenses. If they add up to more than the standard deduction, itemizing cuts your taxable income even further.

Claim all eligible tax credits. The Child Tax Credit is now $2,200 per qualifying child. The Earned Income Tax Credit and education credits reduce what you owe after your taxable income is calculated.

Use the new charitable deduction. Starting in 2026, you can deduct up to $1,000 in cash charitable donations ($2,000 for joint filers) even if you take the standard deduction. That's free money off your taxes for giving back.

Simplify payroll and taxes with Homebase

Sunday night panic over missing payroll records? We get it. That's exactly why Homebase automatically tracks everything you need for tax time.

When you run payroll through Homebase, you get:

• Automatic W-2 generation with accurate wage information for calculating your AGI—no more hunting through spreadsheets at midnight
• Precise overtime calculations so your team's taxable income is always correct
• Built-in tip tracking and reporting that handles the complex math for tipped employees
• PTO accrual tracking that affects both your AGI and your team's taxable income
• One-click tax reporting that turns hours into paychecks without the Sunday night calculator sessions

Your team gets instant access to their pay records through the app. You get peace of mind knowing the numbers are right when tax season hits.

Ready to stop stressing about payroll? Try Homebase free today.

"It was the worst thing in the world. [Running payroll] took me hours and hours, and a ton of clicks, and none of it made any sense... I can say without a doubt that having Homebase simplified my life greatly. The fact that I'm not wasting time being angry and frustrated is worth so much to me."

— Kala Maxym, Co-Founder, The Chocolate Dispensary

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FAQs about adjusted gross income vs taxable income

Is AGI your taxable income?

No, AGI is not your taxable income. Adjusted gross income is your total income minus specific adjustments like retirement contributions and student loan interest. 

Taxable income is your AGI minus either the standard deduction or itemized deductions. Your taxable income is always lower than your AGI.

Does the standard deduction reduce AGI?

No, the standard deduction does not reduce your AGI. The standard deduction is subtracted from your AGI to calculate your taxable income. Adjustments like IRA contributions and HSA deposits reduce your AGI, while the standard deduction reduces your taxable income after AGI is calculated.

What's the difference between for AGI and from AGI deductions?

For AGI deductions (above-the-line) are subtracted from gross income to calculate your AGI—things like IRA contributions, HSA contributions, and student loan interest. From AGI deductions are subtracted from your AGI to calculate taxable income—the standard deduction or itemized deductions. For AGI deductions are more valuable because they can increase eligibility for other tax benefits.

Is AGI on your W-2?

No, your AGI is not on your W-2. Your W-2 shows wages and withholdings from a specific employer. Your AGI includes all income sources (wages, self-employment, investments) minus adjustments. You calculate your AGI on Form 1040, Line 11, by combining all income and subtracting qualifying adjustments.

Does AGI include taxes?

No, AGI does not include taxes you've paid. Adjusted gross income is calculated before any taxes are withheld or owed. It represents your income minus specific adjustments, but doesn't account for federal income tax, Social Security tax, Medicare tax, or state taxes. Those taxes are calculated based on your taxable income.

What is adjusted taxable income?

Adjusted taxable income isn't a standard IRS term. You might be thinking of adjusted gross income (AGI) or taxable income. AGI is your total income minus specific adjustments. Taxable income is your AGI minus the standard deduction or itemized deductions. 

Your taxable income is what your tax bill is based on.

Is AGI before or after the standard deduction?

AGI is before the standard deduction. You calculate your adjusted gross income first by taking total income and subtracting specific adjustments. Then you subtract either the standard deduction or itemized deductions from your AGI to arrive at your taxable income. 

The order is: gross income → AGI → taxable income.

How is AGI calculated in 2026?

AGI in 2026 is calculated by starting with total income from all sources (W-2 wages, 1099 income, business income, investments). Then subtract above-the-line deductions like IRA contributions (up to $7,500), HSA contributions (up to $4,400 for individuals), student loan interest (up to $2,500), and new 2026 deductions like qualified tip income and overtime pay if you qualify.

Does AGI include the standard deduction?

No, AGI does not include the standard deduction. Your adjusted gross income is calculated before any deductions are applied. The standard deduction is subtracted from your AGI to calculate your taxable income, which is the amount your tax bill is based on.

Are tax brackets based on AGI?

No, tax brackets are based on your taxable income, not your AGI. After calculating your AGI, you subtract either the standard deduction or itemized deductions to get your taxable income. That taxable income determines which of the seven federal tax brackets apply to your income.