AGI stands for Adjusted Gross Income.
The Internal Revenue Service (IRS) utilizes your adjusted gross income (AGI) amount to calculate your annual income tax liability. It is determined by deducting specific adjustments from gross income, including company costs, student loan interest, and other costs. A taxpayer’s taxable income is calculated by deducting deductions from their adjusted gross income (AGI).
The IRS also uses other income metrics, such as modified AGI (MAGI), for some programs and retirement funds.
Learning about Adjusted Gross Income (AGI)
AGI is a modification of gross income as specified by the U.S. tax code. Your annual earnings, which may include wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement payouts, is your gross income. This figure is calculated before any tax or other deductions. Your gross income is subject to several adjustments by AGI to determine the amount from which your tax liability will be determined.
Common Modifications
Adjustments to income are the items that are deducted from your gross income to get your AGI; you disclose them on Schedule 1 of your tax return when you file your annual tax return.7 Here is a list of some of the most typical adjustments, along with a few of the distinct tax forms on which they are calculated:
- (For divorces filed before January 1, 2019) Alimony payments
- Penalties for early withdrawals from savings
educator costs - Armed forces reservists, qualified performers, fee-based state or local government officials, and workers with impairment-related job
- Expenditures are all eligible for employee business expenses (Form 2106)
- Deductions for Health Savings Accounts (Form 8889)
- Military personnel’s relocation costs (Form 3903)
- Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), Simplified Employee Pension (SEP), and qualifying plans for
- Self-employed individuals
- Discount for personal health insurance
- Self-employment tax, which is deductible
- Interest deduction for student loans7
- Instructions for Calculating Adjusted Gross Income
When you input your figures into tax preparation software, it will compute your AGI. If you compute it yourself, you’ll start by totaling your reported yearly income. That may consist of your wage income, which your employer reports to the IRS on a W-2 form, and additional income, such as dividends and other unspecified revenue, reported on 1099 forms.8
Then, you add any taxable income from sources like the gain on the sale of a property, unemployment benefits, pension payments, Social Security benefits, or anything else that hasn’t been previously reported to the IRS. The IRS Schedule 1.7 also includes a list of several of these income items.
The adjustments to the abovementioned income must then be subtracted from your reported income. Your AGI is the resultant number. Subtract the standard deduction or all of your itemized deductions from your AGI to get your taxable income. In most situations, you can select the one that will benefit you most.9
Couples whose itemized deductions surpass that amount typically choose to itemize, while others choose to take the standard deduction, as the standard deduction for tax returns for married couples filing jointly was $25,900 in 2022 and increased to $27,700 in 2023.1011
The IRS lists itemized deductions and the conditions for claiming them independently. Website 9. Your eligibility for many of the deductions and credits available on your tax return is also impacted by your AGI. Generally speaking, the smaller your AGI, the greater the amount of deductions and credits you will be qualified for and the greater your ability to lessen your tax burden.
An Illustration of How AGI Affects Deductions
Let’s say you elected to itemize your deductions because you had high dental costs that year that weren’t covered by insurance. The fraction of such costs that exceed 7.5% of your AGI may be written off by you.12
In other words, if you declare $12,000 in unreimbursed dental expenses and have an AGI of $100,000, you can deduct the $4,500 that exceeds $7,500. You could deduct a bigger portion of the $12,000, in this case, $8,250, if your AGI were $50,000 instead of $50,000, where the 7.5% reduction is just $3,750.
Comparison of Modified Adjusted Gross Income (MAGI) vs. Adjusted Gross Income (AGI)
You may also need to use your modified adjusted gross income, or MAGI, for various tax calculations and government programs. Your AGI serves as the starting point for this calculation, which includes some items like any deductions you make for student loan interest or tuition and fees.2
How much, if anything, you can contribute to a Roth individual retirement account (Roth IRA) in any given year will depend on your MAGI. If you apply for health insurance through the Marketplace under the Affordable Care Act (ACA), it is also utilized to determine your income.413
The AGI and MAGI of many persons with simple financial situations are identical or extremely similar.
The IRS form will request your AGI from the prior year if you file your taxes electronically as a means of identity verification.14
Comparison of adjusted gross income to total income and taxable income
Your gross income includes all the money you made during a year that wasn’t tax-exempt. This can be a salary, compensation, dividend, capital gain, or other payment.
That sum and a few eligible expenses are subtracted from your adjusted gross income.
Then, taxpayers can either itemize the deductible costs they paid for the year or take the standard deduction based on their filing status. The standard deduction and itemized deductions cannot be claimed simultaneously. Your taxable income is the outcome.
The amount of state income taxes an individual must pay is determined by several U.S. states using the AGI from federal tax filings. States can further alter this amount through state-specific deductions and credits.
Conclusion
- The amount of income tax you owe for the entire year is calculated by the IRS using your adjusted gross income (AGI).
- Your AGI is calculated by taking the total of your yearly earnings (gross income) and deducting certain income adjustments.
- Your AGI may impact your ability to contribute to some types of retirement plans, such as a Roth individual retirement account (Roth IRA), as well as the magnitude of your tax deductions.
- Your modified adjusted gross income (MAGI) is your AGI, less a few normally permitted deductions. AGI and MAGI will frequently be the same for many folks.
- Alimony payments and educator costs are deducted from your gross income when determining your AGI.
