Eli5: why when asked for income info. are you asked for gross-income instead of net-income?


Why not net income when you are certainly taking home less than you earned after taxes that are mandatory? Then when you include health insurance it’s much less.


In: Economics

I’m not sure what income info you’re referring too, but it’s probably because taxes are subjective enough that they confuse the reporting. Deductions, credits, type of income, and previous losses are all important factors in how much tax you pay in a given year, so looking at net income doesn’t give as clear a picture as gross will

Because mortgage interest and taxes are deductible to a certain extent and some of these can phase out based on the total gross income not the net. Not to mention there are deductions that can increase net income. If the applicant is carrying over losses from a previous year their net income will be misleadingly high.

Gross means the mortgage vendor can work out the normal taxes, where everything should be, and the worse case scenario when considering whether the applicant meets the appropriate loan to value and debt to income ratios.

Net income varies based on state and local tax rates you happen to reside in, federal deductions and credits, withholding a for health insurance and retirement plans, etc. so they aren’t apples-to-apples comparisons. It’s also easier to manipulate gross by, say stopping all 401k withholdings, temporarily. Or people might just report their take home pay without trying up the figure to any end of year taxes owed or refund.

Probably because most people know their gross income off the top of their head (their hourly rate or salary), compared to having to mentally calculate deductions from taxes, benefits, etc.

Also the gross number is bigger, and when comparing to other people it feels nicer to say the bigger number. Same reason people round down on their weight when asked and round up when asked about their height.

As far as businesses/banks asking, probably because it’s a quick answer without having to actually calculate net since each person’s net pay is pretty unique based on many factors.

Gross includes some things (taxes) which are pretty standard for most people, but also some discretionary things (like 401k contributions) which are available but not present in net.

So for example, if I put $1000/month into 401k contributions, then if I hit a rough patch and couldn’t pay my mortgage, I could easily drop my 401k contributions to 0 temporarily and then could easily cover the mortgage.

Depending on who’s asking, something like that might be what they’re considering.

That’s a little different from asking for total compensation, which is gross plus what your employer throws in for things like healthcare, insurance, 401k matches, etc. You wouldn’t have access to that no matter what, and it’s not standardized like payroll taxes (social security and medicare), so gross is a better thing to look at.

Usually places asking for that will also ask for a paystub or something so they can see how much goes where and then they have both your net and your gross, as well as a clear picture of what portion of the difference is discretionary and what portion is mandatory.