What is Adjusted Gross Income?

Adjusted Gross Income (AGI) refers to an individual’s total gross income less specific deductions. AGI is the starting point to compute the tax due from an individual taxpayer in the United States.

Adjusted Gross Income

What is adjusted gross income?

Your adjusted gross income (AGI) is equal to your gross income minus any eligible adjustments that you may qualify for. These adjustments to your gross income are specific expenses the IRS allows you to take that reduce your gross income to arrive at your AGI. Some of these adjustments to income include contributions to your traditional IRA, student loan interest, and alimony payments.

If you’re doing your own taxes, you can calculate your AGI with an online calculator from a source you trust, or there are DIY tax programs that can also help you to determine this figure and guide you through preparing and filing both your federal and state tax returns.

Your AGI is an important calculation not only because it influences your tax bracket, but may determine your eligibility to claim additional deductions and credits that may be available to you when you file your tax returns. Moreover, there are some states that may use your AGI as a base for calculating your state taxable income.

Understanding Adjusted Gross Income (AGI)

Adjusted gross income (AGI) is a variation of your gross income that accounts for certain deductions that usually make it lower than your gross income. By contrast, gross income is the total amount of money you earn in a year before income taxes or other deductions are taken out. Because of this distinction, AGI is typically the foundation for calculating how much you’ll owe in taxes.

Your AGI heavily affects what deductions and credits you’re eligible for in a tax year. For example, if you have a low AGI, you’ll likely be able to claim more in deductions and credits than someone with a higher AGI.

How to calculate Adjusted Gross Income (AGI)?

The AGI calculation is relatively straightforward.  Using the income tax calculator, simply add all forms of income together, and subtract any tax deductions from that amount.  Depending on your tax situation, your AGI can even be zero or negative.

The items subtracted from your gross income to calculate your AGI are referred to as adjustments to income, and you report them on Schedule 1 of your tax return when you file your annual tax return. Some of the most common adjustments are listed here, along with the separate tax forms on which a few of them are calculated:

  • Alimony payments
  • Early withdrawal penalties on savings
  • Educator expenses
  • Employee business expenses for armed forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses (Form 2106)
  • Health Savings Account (HSA) deductions (Form 8889)
  • Moving expenses for members of the armed forces (Form 3903)
  • Self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
  • Self-employed health insurance deduction
  • Self-employment tax (the deductible portion)
  • Student loan interest deduction

How Your AGI Is Used

There are several important ways your AGI is used:

  • Determining your federal (and state) tax liability. Your AGI is part of the equation to calculate your taxable income and your federal tax liability. If you live in a state that requires you to pay state income taxes, your AGI will be used to determine your state taxes, too.
  • Determining your eligibility for tax credits and deductions. Your AGI directly affects the tax credits and below-the-line deductions you’re eligible for, especially if you plan to itemize deductions (instead of taking the standard deduction). But it can get a little tricky: Some tax credits and itemized deductions are dependent on your modified adjusted gross income (MAGI), not your AGI. No surprise: Your AGI is the starting point for determining your MAGI. To learn more about MAGI, read “What Is Modified Adjusted Gross Income?”
  • To e-file your taxes. If you’re choosing to e-file your taxes, you’ll need to find your AGI from the previous year. If you’ve e-filed before, you should be able to import last year’s data if you’re using the same tax preparation software.

The significance of adjusted gross income (AGI)

Your AGI is often the starting point for calculating your tax bill. From there, you’ll make various adjustments and subtract your allowable deductions to find the amount on which you’ll pay tax: That’s your taxable income. You’ll see the term “adjusted gross income (AGI)” repeated throughout your tax forms.

AGI is the basis on which you might qualify for many deductions and credits. For example, you may be able to deduct unreimbursed medical expenses, but only when they’re more than 7.5% of your AGI. So the lower your AGI, the greater the deduction.

Your state tax return might also use your federal AGI as a starting point. If you file taxes online, your software will calculate your AGI.

Leave a Comment