What is Adjusted Gross Income (AGI)?
Adjusted Gross Income (AGI) is the Internal Revenue Service’s figure for determining your income tax for the year. It is calculated by subtracting certain adjustments from gross income, such as business expenses, student loan interest payments, and other expenses.
After calculating the AGI, the next step is to subtract the deductions to determine the taxpayer’s taxable income. In addition, the IRS also uses other measures of income, such as the Modified AGI (MAGI) for specific programs and retirement accounts.
Key points to remember
- The Internal Revenue Service uses your adjusted gross income (AGI) to determine the amount of income tax you owe for the year.
- AGI is calculated by taking all of your income for the year (your gross income) and subtracting certain “income adjustments”.
- Your AGI can affect the number of your tax deductions as well as your eligibility for certain types of retirement plan contributions, such as a Roth IRA.
- Modified Adjusted Gross Income is your AGI with some otherwise allowable deductions added. For many people, AGI and MAGI will be the same.
- Among the items subtracted from your gross income when calculating your AGI are alimony payments and education expenses.
Understanding Adjusted Gross Income (AGI)
As prescribed in the United States tax code, adjusted gross income is a modification of gross income. Gross income is simply the sum of all the money you earned in a year, which can include salaries, dividends, capital gains, interest income, royalties, rental income, alimony, and pension distributions. AGI makes certain adjustments to your gross income to reach the figure on which your tax payable will be calculated.
Many US states also use the AGI of federal returns to calculate how much individuals owe in state income taxes. States can further modify this number with state-specific deductions and credits.
Items subtracted from your gross income to calculate your AGI are called income adjustments 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 some of them are calculated:
- Alimony Payments
- Early withdrawal penalties on savings
- Educator expenses
- Employee business expenses for armed forces reservists, skilled entertainers, state or local government officials paid on a fee basis, and employees with disability-related work expenses (Form 2106)
- Health Savings Account (HSA) Deductions (Form 8889)
- Moving Expenses for Members of the Armed Forces (Form 3903)
- SEP, SIMPLE and qualified schemes for the self-employed
- Deduction for self-employed health insurance
- Self-employment tax (the deductible part)
- Student loan interest deduction
- Tuition and Fees (Form 8917)
Calculating your adjusted gross income (AGI)
If you use software to prepare your tax return, it will calculate your AGI once you enter your numbers. If you calculate it yourself, you will start by counting your reported income for the year. This can include labor income, as reported to the IRS by your employer on a W-2 form, as well as any income, such as dividends and miscellaneous income, reported on 1099 forms.
Then you add any taxable income from other sources, such as profits on the sale of a property, unemployment benefits, pensions, social security payments, or anything else that hasn’t already been reported. at the IRS. Many of these income items are also listed in IRS Schedule 1.
The next step is to subtract the adjustments applicable to the earnings listed above from your reported earnings. The resulting figure is your adjusted gross income. To determine your taxable income, subtract either the standard deduction or the total of your itemized deductions from your AGI. In most cases, you can choose the one that gives you the most benefits. For example, the standard deduction for 2021 tax returns for married couples filing jointly is $25,100 and $25,900 in 2022, so couples whose itemized deductions exceed this amount would generally choose to itemize, while others would take the standard deduction.
The IRS provides a list of itemized deductions and the requirements for claiming them on its website. Your AGI also affects your eligibility for many deductions and credits available on your tax return. In general, the lower your AGI, the more deductions and credits you can claim and the more you can reduce your tax bill.
An example of adjusted gross income (AGI) affecting deductions
Let’s say you had major dental expenses during the year that weren’t reimbursed by insurance and you decided to itemize your deductions. You are allowed to deduct the portion of these expenses that exceed 7.5% of your AGI.
This means that if you claim $12,000 of unreimbursed dental expenses and you have an AGI of $100,000, you can deduct the amount that exceeds $7,500, or $4,500. However, if your AGI is $50,000, the 7.5% reduction is only $3,750 and you would be entitled to a deduction of $8,250.
Adjusted Gross Income (AGI) vs Modified Adjusted Gross Income (MAGI)
In addition to AGI, some tax calculations and government programs require the use of what is called your Modified Adjusted Gross Income, or MAGI. This figure starts with your adjusted gross income and then adds in some things, such as deductions you make for student loan interest or tuition and fees.
Your MAGI is used to determine how much, if any, you can contribute to a Roth IRA in a given year. It is also used to calculate your earnings if you purchase Marketplace health insurance under the Affordable Care Act (ACA).
Many people with relatively simple financial lives find that their AGI and MAGI are the same number or very close.
If you file your taxes electronically, the IRS form will ask for your AGI from the previous year as a way to verify your identity.
You report your AGI on line 11 of IRS Form 1040 which you use to report your income taxes for the year. Keep this number handy after you complete your taxes, because you’ll need it again if you file your taxes electronically next year. The IRS uses it to verify your identity.
Also note that starting January 2022, almost anyone can use the IRS Free File program to file your federal (and, in some cases, state) taxes electronically at no cost.
What does Adjusted Gross Income (AGI) mean for tax payments?
The AGI is essentially your income for the year after taking into account all applicable tax deductions. This is an important number that is used by the IRS to determine how much you owe in taxes. The AGI is calculated by taking your gross income for the year and subtracting any deductions you are entitled to. Therefore, your AGI will always be less than or equal to your gross income.
What are the common adjustments used to determine the AGI?
There are a wide variety of adjustments that can be made when calculating the AGI, depending on the financial situation and life of the filer. Additionally, since tax laws can be changed by the legislator, the list of available adjustments may change over time. Some of the most commonly used adjustments when calculating AGI include reductions for child support, student loan interest payments, and tuition fees for qualifying institutions.
What is the difference between AGI and Modified Adjusted Gross Income (MAGI)?
AGI and MAGI are very similar, except that MAGI add some deductions. For this reason, MAGI would always be greater than or equal to AGI. Common examples of deductions that are added back to calculate MAGI include income earned overseas, income earned on US savings bonds, and losses resulting from a publicly traded partnership.