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 your tax bill, and among other things, is the basis for many deductions and credits.

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, which may include includes 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 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.

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:

  • Unreimbursed business expenses
  • Medical expenses
  • Healthcare savings account (HSA) deductions
  • Alimony
  • Student loan interest
  • Moving expenses
  • 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 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.

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 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.

The amount of a taxpayer's AGI directly influences his or her eligibility to claim many of the deductions and credits available on your 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 must reduce the total expense by 7.5 percent of her AGI for tax years 2017 and 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 your AGI is $50,000, the reduction is only $3,250.

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). The MAGI modifies the adjusted gross income by adding back certain items such as foreign earned income, tax-exempt interest, and the excluded portion of Social Security benefits.

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