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.
BREAKING DOWN Adjusted Gross Income (AGI)
Adjusted gross income 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 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. 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. may U.S. states base a filer's total tax bill based 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
- Unreimbursed business expenses, including most rental activity; not available to employees
- Half of self-employment tax
- Medical expenses
- Healthcare savings account (HSA) deductions
- Alimony (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 to an filer's employer
- Some business-related expenses incurred by performing artists, teachers, fee-basis government officials and reservists
Adjusted Gross Income (AGI) Calculation
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 taking.
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.
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 must reduce the total expense by 7.5 percent 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
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.
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 advent of the Tax Cuts and Jobs Act in late 2018, the 1040 has been simplified, and 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. These items are reported on new schedules 1 through 6.
In many cases additional forms and schedules are required for files who itemize or are involved in certain trades and business activities, or have certain types of income or deductions. For example, Schedule B is used for interest and dividends. Schedule C is used by certain businesses, such as S corporations and partnerships, to account for business income. For farms, there is Schedule F; for rental income there is Schedule E.
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.