What Is Adjusted Gross Income (AGI)?
Adjusted gross income (AGI) is a measure of income calculated from your gross income and used to determine how much of your income is taxable. It is the starting point for calculating a filer's tax bill in the United States and, among other things, is the basis for many deductions and credits. When filing your taxes online—as about 80% of filers do—the software you use will calculate your AGI for you.
- Adjusted Gross Income (AGI) is calculated by making "above the line" adjustments to a taxpayer's gross income.
- AGI, reported on the IRS Form 1040, is used to calculate an individual's tax liability.
- AGI directly influences a taxpayer's eligibility to claim many of the deductions and credits available on the tax return.
Adjusted Gross Income
How Adjusted Gross Income (AGI) Is Used
AGI is a modification of gross income in the United States tax code. Gross income is simply the sum of all money an individual earns in a year, which may include wages, dividends, alimony, capital gains, interest income, royalties, rental income, and retirement distributions. AGI factors a number of allowable deductions from one's gross income to reach the figure on which an individual's income tax liability will be calculated.
AGI is generally more useful than gross income for individual tax activities. The deductions that 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. Above the line deductions are also taken into account before any standard deductions, or before itemized deductions taken by a taxpayer on the Schedule A.
Many U.S. states base a filer's total tax bill on a calculation starting with adjusted gross income. From there, state-specific deductions and credits are factored in to determine an individual's state taxable income.
Adjusted Gross Income (AGI) Deductions and Credits
The deductions you take to calculate AGI are referred to as adjustments to income. Some of the most prominent deductions made to reach an individual's adjusted gross income include:
- Certain retirement plan contributions, such as Individual Retirement Accounts (IRA), SIMPLE IRA, SEP IRA, and qualified plans
- Half of the self-employment tax
- Healthcare savings account (HSA) deductions
- Alimony paid (included in the recipient's gross income)
- Moving expenses (but starting in 2018, only if you're active-duty military moving due to military orders)
- Losses incurred from the sale or exchange of property
- Early-withdrawal penalties levied by financial institutions
- School tuition, fees, and student loan interest (exceptions and limits usually apply)
- Jury duty pay turned over to a filer's employer
- Some business-related expenses incurred by performing artists, teachers, fee-basis government officials, and reservists
Calculating Adjusted Gross Income (AGI)
When calculating AGI, begin by tallying your reported income for the year in question, while also adding other sources of taxable income: profit on the sale of a 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 and payments. After these payments have been subtracted from gross income, the resulting figure is the adjusted gross income, which serves as the starting point for calculating a taxpayer's taxable income.
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.
With the passage of The Tax Cuts and Jobs Act (TCJA), fewer filers are expected to itemize given the increased standard deduction (about 10% of all filers down from about 30%), though itemization should remain a useful tax-reduction strategy for wealthier filers.
A complete list of the requirements for possible deductions from gross income can be found in the Internal Revenue Code (IRC) or on the Internal Revenue Service (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 prior to taking any deductions.
AGI directly influences a taxpayer's eligibility to claim many of the deductions and credits available on the tax return. The lower the AGI, the greater the deductions and credits one will be eligible to receive.
For example, if a taxpayer itemizes deductions and reports dental expenses, she may only take a deduction for the portion of the dental expense exceeding 7.5% of her AGI for tax year 2018. This means that if she reports $10,000 in dental expenses and an AGI of $100,000, she must reduce her deduction by $7,500. But if her AGI is $50,000, the reduction is only $3,750.
Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)
When working on individual taxes, the AGI is an important step in determining how much of one's gross income is taxable. Be careful not to confuse AGI with modified adjusted gross income (MAGI). The MAGI modifies the adjusted gross income figure further by adding back certain items such as foreign earned income, tax-exempt student loan interest, and higher education costs.
MAGI is used in the calculation of certain tax benefits, credits, and exclusions. For example, MAGI is used to determine how much of an individual's IRA contribution is deductible and whether an individual is eligible for premium tax credits.
Adjusted Gross Income (AGI) and IRS Form 1040
Adjusted gross income is reported on IRS Form 1040 (more formally known as the "U.S. Individual Income Tax Return"). Before 2018, filers needed to study the various 1040 versions to determine which one to use. But with the implementation of the Tax Cuts and Jobs Act in late 2018, the form 1040 has been simplified, and the Form 1040-EZ and Form 1040A have been retired. The new 1040 used by all filers is a short two-pager and is mostly for recapping income, deductions, and credits. The more detailed information previously reported on Form 1040 is now reported on the new schedules 1 through 6.
In many cases, additional forms and schedules are required for filers who itemize, are involved in certain trades and business activities, or have certain types of income or deductions. For now, many of these schedules remain in use.
For example, Schedule A is used to report itemized deductions. Schedule B is used for interest and dividends. Schedule C is used by small business owners, such as those with business income from a sole proprietorship or those who are the sole owner of a limited liability company (LLC). Schedule D reports capital gains and losses. For rental income there is Schedule E; for farms, there is Schedule F.
According to the IRS, "Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income." On 2018 returns, filers can get a quick estimate of their AGI by looking at line 37 on their Form 1040. If filing using the Married-Filing Jointly option, the $66,000 AGI limitation applies to both individuals combined. To e-file a federal tax return, one must verify their identity with their AGI or self-selected PIN from their 2018 tax return. (For related reading, see "Do 401(k) Contributions Reduce AGI and/or MAGI?")