Adjusted Gross Income (AGI)

What Is Adjusted Gross Income (AGI)?

Adjusted gross income is the total amount of money you earn during a given tax year minus certain adjustments that the IRS uses to determine your total income tax liability.

Understanding Adjusted Gross Income (AGI)

AGI, or adjusted gross income, is sometimes used as a United States tax code parameter. It is a modification of gross income, the sum of all money earned in a year across salary, dividends, capital gains, interest income, royalties, rent, and alimony payments. An AGI has to be pegged against an individual’s annual tax payment. Adjusted Gross Income (AGI) accounts for certain deductions and exemptions that will be allowed on your tax return. AGI is the basis on which your taxable income is calculated.

All U.S. residents are required to file an annual income tax return with the IRS. Since states use the AGI from their federal returns to compute state income tax liability, they must enter your state numbers correctly. Your state may allow changes to your AGI based on specific deductions and credits unique to that state.

When you prepare your taxes, certain items are subtracted from your gross income to calculate Adjusted Gross Income. These items are known as adjustments to income, and they are reported on Schedule 1 of your tax return when you file.

A few of the common adjustments are listed below

  • Alimony payments are not considered taxable income, but you must claim them as deductions if you file separately.
  • If you withdraw before the due date, penalties will be applied.
  • Educator expenses
  • Self-employed health insurance deduction
  • Self-employment tax 
  • Student loan interest deduction
  • Tuition and fees 

Calculating Your Adjusted Gross Income (AGI)

Calculating the adjusted gross income (AGI) can be tricky. To do it yourself, simply tally your reported income for the year, including income from a job, as reported to the IRS on a W-2, and other income, such as dividends and miscellaneous income reported on 1099 forms.

If you will do it using software, all you need to do is input the numbers, calculating the AGI.

If you have taxable income that wasn’t reported to the IRS, then add them. Such amounts can include self-employment, interest, dividends, unemployment benefits, pensions and annuities, and Social Security payments.

To establish your adjusted gross income, you must reduce certain adjustments to income from your reported income.

Calculating your adjusted gross income (AGI) gets you one step closer to calculating your taxable income. You can subtract either a standard deduction or itemized deductions from your AGI to get to your taxable income.

When calculating your adjusted gross income (AGI), it’s important to consider various deductions and tax credits available on your return. Your AGI, used to determine eligibility for many deductions and credits, will determine the amount of various tax credits you may be eligible to claim. The more deductions and credits you can claim, the lower your taxable income.

An Example of Adjusted Gross Income (AGI) Affecting Deductions

  1. An example of AGI affecting deductions is a married couple with two children on joint income. The first $100,000 of income is taxed at 15 percent, while the following $100,000 is taxed at 20 percent. If neither spouse is filing separately, then the first child’s $15,000 is taxed at 15 percent, even though it doesn’t seem much.
  2. For example, if you earn $50,000 but owe $25,000 in taxes, your actual income for the year would be $60,000 – $25,000 = $45,000 after accounting for taxes. However, if you had a $10,000 deduction for health insurance, this could lower your actual income by $10,000 (which would lower your standard deduction).

Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)

Adjusted Gross Income is an income tax term that refers to a taxpayer’s income before deductions. In formulas, you may see it referred to as AGI. However, some instances and government programs call for using your modified adjusted gross income, or MAGI.

Your modified adjusted gross income (MAGI) may determine if you qualify for deductions, tax credits, or other benefits. The purpose of it is for independent taxpayers with dependents.

Your Modified Adjusted Gross Income (MAGI) determines your eligibility for a Roth IRA. You may also be eligible for discounted or free health care coverage if you qualify for Medicaid.

Most taxpayers’ adjusted gross income (AGI) and modified adjusted gross income (MAGI) are the same.

Special Considerations

After filing your taxes, you’ll need to report the amount of Adjusted Gross Income (AGI) on line 8b of your IRS Form 1040. You’ll need this number again when you e-file your taxes next year to verify that you’re the actual filer.

If your Adjusted Gross Income (AGI) is $72,000 or less, you are eligible to file your taxes in Free File.

The significance and implications of AGI

Adjusted gross income (AGI) is an important figure on tax forms. It’s often the starting point for calculating your tax bill by government and private institutions during tax season. From there, you make various adjustments to deduct allowable deductions to find the amount on which you’ll pay taxes.

AGI is an important factor in determining whether you are eligible for certain deductions and credits. If your AGI is too low, then you may not qualify for certain deductions. This tends to be the case when the deduction lowers your AGI below a certain point.

If you are filing taxes online, your software will calculate it for you.