Calculating your adjusted gross income (AGI) is one of the first steps in determining your taxable income for the year. Once you have determined what your adjusted gross income is, you can determine your tax liability 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, here are some helpful tips for how to calculate your adjusted gross income (AGI) for tax purposes.
- Calculating your adjusted gross income (AGI) is one of the first steps in determining your taxable income for the year.
- The first step in computing your AGI is to determine your income for the year, which includes your traditional salary and wages, in addition to any earnings from self-employment ventures, and any other income reported on 1099 forms, like investment dividends and retirement income.
- To arrive at your final AGI, you are allowed to subtract certain amounts from your total income, including classroom expenses for teachers, a deduction for self-employment health insurance premiums, and a deduction for charitable donations, among many others.
- Figuring out your AGI may seem like a simple process at first; however, if you don't hire a tax professional, you run the risk of making costly mistakes.
Before you calculate your AGI, you should determine whether or not you need to file a tax return for the year. The Internal Revenue Service (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. Even if you are not required to file a tax return, the IRS recommends that you still file a tax return. This is because you may be eligible for a tax return if you paid income tax, or you may be eligible for certain credits.
How To Calculate AGI For Tax Purposes
Gather Your Income Statements
The first step in computing your AGI is to determine your income for the year. Income can be in the form of money, property, or services you receive in the tax year.
Income includes your traditional salary and wages, which are reported on Form W-2, any earnings from self-employment ventures, and any other income reported on 1099 forms, like investment dividends and retirement income. Proceeds from broker and barter exchange transactions reported on Form 1099-B, proceeds from real estate transactions reported on Form 1099-S, any taxable interest reported on Form 1099-INT, and any investment dividends reported on Form 1099-DIV are all considered part of your taxable income.
In addition, you will also need to include these sources of taxable income:
- Business income
- Farm income
- Union strike benefits
- Taxable refunds, credits, or offsets of state and local income taxes
- Long-term disability benefits received prior to minimum retirement age
- Jury duty fees you earned
- Security deposits and rental property income
- Awards, prizes, gambling, lottery, and contest winnings
- Back pay from labor discrimination lawsuits
- Unemployment benefits
- Capital gains
- Severance pay
- Earnings from rental real estate, royalties, partnerships, S corporations, trusts, and license payments
You can calculate your total income by adding all of these amounts together.
Income That Is Not Taxed
Some types of income are not taxed. The following sources of income do not count toward your AGI:
- Workers' compensation benefits
- Child support benefits
- Life insurance proceeds (unless the policy was turned over to you for a price)
- Disability payments
- Capital gains on the sale of your primary home
- Money received as a gift or other inherited assets
- Canceled debts intended as a gift to you
- Scholarships or fellowship grants
- Foster care payments
- Money rolled over from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)
Subtract Deductions and Expenses
To arrive at your final AGI, you are allowed to subtract certain amounts from your total income.
Classroom Expenses for Teachers and Educators
If you are a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours a school year in a school that provides elementary or secondary education, you can deduct up to $250 for unreimbursed work-related expenses you incur during the tax year.
Deduction for Self-Employment Tax
As a self-employed person, you pay the full share of your Social Security and Medicare taxes. Because of this, you are eligible for a credit from the IRS if you claim the self-employment tax deduction.
Self-Employment Health Insurance Deduction
If you are self-employed, you can deduct the entire amount of what you spend on premiums through the self-employment health insurance deduction. This also applies if the policy covers your spouse and your dependents.
Qualified Performing Artists and Other Professions
You can adjust your income if you are a qualified artist, as well as a reservist and some fee-basis government officials.
In addition to these deductions, there are also deductions for charitable contributions and contributions to Health Savings Accounts (HSAs). For moving expenses—provided you are in the armed forces—there are various costs related to self-employment, savings early withdrawal penalty amounts, and student loan interest. (In addition to health insurance premiums and half of the self-employment tax, retirement plan contributions are also deductible for people who are self-employed.)
Be careful when figuring the amounts for these categories, as special requirements must be met for each.
Modified AGI vs. AGI
A common mistake made by inexperienced tax preparers is to use AGI in cases where their modified AGI should be used. While your AGI is used 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. While the cost of hiring a tax professional may cost you more, it may be well worth it considering 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, especially 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.