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 90% 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.
How Adjusted Gross Income (AGI) Works
AGI is a modification of gross income in the United States tax code. Gross income is simply the sum of all the 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 your gross income to reach the figure on which your 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 itemized deductions taken by a taxpayer on Schedule A and standard deductions.
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.
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 since 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 your taxable income.
After calculating AGI, you can either apply the standard federal tax deductions to reach your taxable income. Or, if eligible, you can itemize your expenses and take itemized deductions instead, which can be better for you in some situations.
With the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, fewer filers were expected to itemize (about 10% of all filers down from about 30%), given the increased standard deduction and $10,000 limit on deductions for state and local taxes (SALT), 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 you must look very carefully at the federal tax code to make sure you are eligible prior to taking any deductions.
AGI directly influences your eligibility to claim many of the deductions and credits available on your tax return. The lower the AGI, the greater the deductions and credits you will be eligible to receive.
An Example of Adjusted Gross Income (AGI) Affecting Deductions
Say that you itemize deductions and report dental expenses not reimbursed by insurance. You may only take a deduction for the portion of the dental expenses exceeding 10% of your AGI for the tax year 2019. This means that if you report $12,000 in unreimbursed dental expenses and have an AGI of $100,000, you must reduce your deduction by $10,000, ending up with a $2,000 deduction. However, if your AGI is $50,000, the reduction is only $5,000, and you are left with a $7,000 deduction.
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 your gross income is taxable. Be careful not to confuse AGI with modified adjusted gross income (MAGI). 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 your annual IRA contributions is deductible and whether you are 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). The form is a short two-pager and used mostly for recapping income, deductions, and credits. More-detailed information is reported on 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.
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, and for farms there is Schedule F.
According to the IRS, “Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income.” You can get a quick estimate of your AGI by looking at line 7 on Form 1040. If you are married filing jointly, the $69,000 AGI limitation to be allowed to use IRS free file applies to both you and your spouse combined. To e-file a federal tax return, you must verify your identity for the IRS, either with your AGI from last year’s return or a self-selected personal identification number (PIN). The IRS has stopped issuing new PINs due to cyber attacks, but you can still use yours if you selected it in a previous year.