Calculating your adjusted gross income (AGI) is one of the first steps in determining your taxable income for the year. If you are an experienced tax preparer, this calculation can be easy. However, if you are preparing your tax return for the first time, or you're not an expert, you might find the following tips helpful.
Before Determining Your AGI
Determining your AGI would be a waste of time and resources if you are not required to file a tax return. Therefore, before you calculate your AGI, you should determine whether or not you need to file a tax return for the year. The IRS provides an interactive tax assistant that can be used to help you determine if you need to file a tax return for the year. This can be found on the IRS website. Even if you are not required to file a tax return, the IRS recommends that you do if you are eligible for a tax return which might be the case if you paid income tax, or if you are eligible for certain credits.
Gather Your Income Statements
The starting point for computing your AGI is determining your income for the year. This includes salaries and wages, which are reported on Form W-2, self-employment income, and income reported on 1099 forms, such as proceeds from Broker and Barter Exchange Transactions reported on Form 1099-B, proceeds from Real Estate Transactions reported on Form 1099-S, Form 1099-INT used to report taxable interest and 1099-DIV, which is used to report taxable dividend. You will need to add other taxable income, such as:
- Taxable refunds, credits, or offsets of state and local income taxes
- Business income
- Capital gains or losses
- Other gains or losses
- Distributions from retirement accounts that are taxable
- Rental real estate, royalties, partnerships, S corporations, trusts, etc.
- Farm income
- Unemployment compensation
- Social security benefits, and
- Other income not reported elsewhere on your tax return
The total of these amounts is your "total income."
Subtract Deductions and Expenses
You are allowed to subtract certain amounts from your total income in order to arrive at your AGI. These are:
- Educator expenses, which applies to eligible educators for up to $250
- Certain business expenses of reservists, performing artists, and fee-basis government officials
- Health savings account deduction
- Moving expenses
- Deductible part of self-employment tax
- Self-employed SEP, SIMPLE, and qualified plans
- Self-employed health insurance deduction
- Penalty on early withdrawal of savings. This should not be confused with the 10% early distribution penalty that applies to any distributions from retirement account that occur before you reach age 59.5; such amounts are reported as taxable income in the "other taxes" section of your tax return.
- Deduction for contributions made to your traditional IRA
- Student loan interest deduction
- Tuition and fees and
- Domestic production activities deduction
Be careful when figuring the amounts for these categories, as special requirements must be met for each. For example, for moving expenses, your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home. You are also required to work a minimum number of hours on a full time basis over specific periods.
Don't Confuse MAGI with AGI
A common mistake made by inexperienced tax preparers is to use AGI in cases where the modified AGI should be used. While your AGI is used in the calculating done to determine the amount of income tax you owe and certain credits for which you are eligible, your modified AGI is used to determine eligibility for items such as deducting contributions to a traditional IRA, or eligibility to contribute to a Roth IRA.
Work with a Professional
Unless you have the time and aptitude to follow the IRS instructions and conduct any necessary research, it might be more practical to use the services of an experienced tax professional. Professionals' services may cost you, but they may be well the worth the time saved and frustration prevented from trying to figure out the rules on your own.
The Bottom Line
Figuring out your AGI may seem like a simple process at first glance. However, even if you use the IRS instructions for completing your tax return, you run the risk of making costly mistakes if you are inexperienced. Even if you complete the process on your own, consider having a tax professional review your results to help ensure accuracy.