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Adjusted gross income (AGI) is a term from the Internal Revenue Code that refers to a number used on the Form 1040 U.S. Individual Income Tax Return.  AGI is used to determine a person’s income taxes due. The formula is:

Gross income from taxable sources - allowable deductions = AGI

AGI is calculated by subtracting certain “above the line” deductions from total income.  Above the line deductions are listed on page one of the AGI section of Form 1040.  Some typical above the line deductions are IRA contributions, health savings account payments, alimony paid, educator expenses, tuition expenses and student loan interest. 

The next step in calculating taxable income is to subtract itemized deductions from AGI.  Itemized deductions are listed on Schedule A of form 1040. 

AGI plays an important part in determining other numbers in a person’s tax calculation.  It is often used to determine qualifications for specific tax benefits and is used to limit certain deductions. For instance, medical deductions on Schedule A may be limited based on the amount of a taxpayer’s AGI. 

Generally, the lower a taxpayer’s AGI, the better. One additional factor that makes AGI important is that many states base their state income tax on the taxpayer’s AGI amount. 

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