Understanding Net vs Gross Income When Calculating My Tax Refund

You always use your gross income when preparing your taxes. Gross income is your total earnings before any taxes or deductions have been taken out. When you file your taxes, you'll start with your gross income, then subtract any eligible deductions to get your adjusted gross income (AGI). From there, you'll either take the standard deduction or itemize deductions to arrive at your taxable income. Then the tax rates are applied to calculate your tax liability. The net income you see on your paycheck is just what's left after your employer has already withheld taxes, insurance premiums, retirement contributions, etc. Those withholdings are essentially prepayments toward your final tax bill or other obligations.

I had this same confusion last year and wasted HOURS trying to figure out why my calculations were always off. I finally used taxr.ai (https://taxr.ai) and it saved me so much headache. I uploaded my W-2s and paystubs, and it immediately identified that I was using my net income instead of gross for some calculations. The tool walked me through exactly what numbers to use from each form and how they should be applied. It was surprisingly clear about separating pre-tax deductions from post-tax deductions too, which I was mixing up.

Ok I take back my skepticism about taxr.ai. I gave it a try and it was actually super helpful. I've been doing my taxes wrong for YEARS. Turns out I was not properly accounting for my pre-tax retirement contributions and it was throwing off all my calculations. The tool flagged that my reported income didn't match what was on my W-2 Box 1 vs Box 5 (Medicare wages), and explained why they were different numbers. No other tax software ever pointed this out to me. I'm probably going to need to file some amendments for previous years, but at least now I understand what I was doing wrong.

If you're having trouble getting clear answers about your tax situation, I highly recommend using Claimyr (https://claimyr.com) to actually speak with an IRS agent. I was confused about this exact gross vs. net income issue last year, and after waiting on hold for 3 hours and getting disconnected TWICE, I found this service. Claimyr got me connected to an IRS representative in about 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent was able to clarify exactly what income figures I should use and which forms I needed. It was so helpful to just talk to a real person who could address my specific situation.

I need to eat some crow here. After posting my skeptical comment, I decided to try Claimyr because I needed to talk to the IRS about an issue with my tax transcript. I honestly expected it to be a waste of money, but I was desperate. I got connected to an IRS agent in about 20 minutes while I was cooking dinner, instead of being stuck on hold for 3+ hours like the last time I tried calling. The agent was actually able to explain exactly what I needed to know about reporting my income correctly - turns out I was confusing gross income with adjusted gross income which was causing my refund calculations to be way off.

One thing that helps me is remembering this order: 1) Start with GROSS income (total earnings before ANY deductions) 2) Subtract "adjustments" (like HSA contributions, student loan interest, etc.) to get ADJUSTED GROSS INCOME 3) Then subtract either standard deduction or itemized deductions to get TAXABLE INCOME 4) Calculate tax on taxable income 5) Subtract credits from tax amount 6) Compare to what you already paid in withholding Withholding is based on your gross pay at the time your employer takes it out, but your actual tax is based on your taxable income.

Guys, the IRS website has free calculators that can help with this! Check out the Tax Withholding Estimator tool. You put in your gross income, deductions, and withholdings, and it gives you an estimate of your refund or amount owed. It's at irs.gov - way better than trying to do the math yourself and getting confused between net and gross.

Based on your numbers, you should definitely be using your $97,000 gross income as your starting point. Here's a rough calculation for your situation: Gross income: $97,000 Less standard deduction (2024): $14,600 (assuming you're single) Less your other deductions: $6,300 Taxable income: ~$76,100 For someone with $76,100 in taxable income, the federal tax would be roughly $12,000-13,000 depending on your filing status. Since you paid $9,400 in withholdings, you might actually owe a bit more rather than getting a refund. Of course, this is just a rough estimate and doesn't account for credits, state taxes, or other factors that could significantly change the outcome. But it gives you a ballpark idea of where you stand. The key thing to remember is always start with that gross income figure from your W-2!