Adjusted Gross Income - AGI

DEFINITION of 'Adjusted Gross Income - AGI'

Adjusted gross income is a measure of income calculated from your gross income and used to determine how much of your income is taxable.

BREAKING DOWN 'Adjusted Gross Income - AGI'

Adjusted gross income (AGI) is a modification of gross income in the United States tax code.  Gross income is simply the sum of everything an individual earns in a year.  AGI factors a number of deductions from one's gross income to reach the figure for which an individual's income taxes will be calculated, and is generally more useful than gross income for individual tax activities.  The deductions which modify gross income to adjusted gross income are all above the line, which means that they are taken into account before tax exemptions for military service, dependent status, etc.

Some of the most prominent deductions made to reach an individual's adjusted gross income include

  • Unreimbursed business expenses
  • Medical expenses
  • Alimony
  • Retirement plan contributions
  • Losses incurred from the sale or exchange of property

When calculating individual AGI, begin by tallying your reported income statements for the year in question, while also adding other sources of taxable income: profit on the sale of property, unemployment compensation, pensions, Social Security payments and any other income not reported on your tax returns. From this total of earnings, subtract the applicable deductions to reach your AGI. A complete list of the requirements for possible deductions from gross income can be found in the Internal Revenue Code or on the IRS website.  Many of the requirements are very specific, and an individual must look very carefully at the federal tax code to make sure they are eligible for any deductions they are making.  

After calculating AGI, the taxpayer can then apply the standard federal tax deductions to reach their taxable income, or if eligible, the taxpayer can itemize their expenses and receive itemized deductions instead, which can be better for the taxpayer in some situations.  When working on individual taxes, then, the AGI is an important but intermediate step in determining how much of one's gross income is taxable.  Be careful not to confuse AGI with modified adjusted gross income (MAGI), which is used to calculate an individual's deductible amount from an individual retirement account (IRA).

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