What is Adjusted Gross Income (AGI)?
Adjusted gross income (AGI) is your annual gross income minus certain adjustments that the Internal Revenue Service uses to determine your income tax for the year.
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 “adjustments to income”.
- Your AGI may affect the number of your tax deductions as well as your eligibility for certain types of pension plan contributions.
- Modified Adjusted Gross Income is your AGI with some otherwise permitted deductions added. For many people, AGI and MAGI will be the same.
Understanding Adjusted Gross Income (AGI)
As prescribed by 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 have earned in a year, which can include salaries, dividends, capital gains, interest income, royalties, rental income, pensions food, 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 income tax. States can modify this number further 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 more 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 fees
- Employee Business Expenses for Armed Forces Reservists, Qualified Performers, Paying State or Local Government Employees, 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 plans for the self-employed
- Health insurance deduction for self-employed
- Self-employment tax (the deductible part)
- Student loan interest deduction
- Tuition and Fees (Form 8917)
Note to teachers
Educators can deduct unreimbursed expenses they incurred for COVID-19 protective items since March 12, 2020, according to new IRS guidelines. These costs can be included in their maximum educator expense deduction of $250.
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 could include employment 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, like profit on the sale of a property, unemployment compensation, pensions, social security payments, or anything else that hasn’t already been reported. at the IRS. Many of these income items are also listed on IRS Schedule 1.
The next step is to subtract the applicable income adjustments listed above from your reported income. The resulting figure is your adjusted gross income.
To determine your taxable income, subtract the standard deduction or total 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 2020 tax returns for married couples filing jointly is $24,800 ($25,100 for 2021), so couples whose itemized deductions exceed this amount would generally choose to itemize, while d ‘ others would simply take the standard deduction.4
The IRS provides a detailed list of deductions and the conditions for claiming them on its website.
Your AGI also affects your eligibility for many of the 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 significant 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. If 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’s called your Modified Adjusted Gross Income, or MAGI. This figure starts with your adjusted gross income. And then adds back some things. Such as deductions you take 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 income if you have market health insurance under the Affordable Care Act (ACA).
Many people with relatively simple financial lives find their AGI and MAGI to be the same or very close.