Adjusted gross income (AGI) is your annual gross income minus certain adjustments used by the Internal Revenue Service to determine your tax liability for the year.
- The Internal Revenue Service uses your adjusted gross income (AGI) to determine how much income tax you owe for the year.
- AGI is calculated by taking all of your income for the year (your gross income) and subtracting certain “adjustments to income.”
- Your adjusted gross income can affect the size of your tax deductions, as well as your eligibility for some types of retirement plan contributions.
- Modified Adjusted Gross Income is your AGI with some otherwise allowable deductions added. For many people, AGI and MAGI will be the same.
Understanding Adjusted Gross Income (AGI)
As prescribed in the United States tax code, adjusted gross income is a modification of gross income. Gross income is simply the sum of all the money you earned in a year, which can include wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement distributions. AGI makes certain adjustments to your gross income to reach the figure on which your tax liability will be calculated.
Many US states also use the AGI from federal returns to calculate how much people owe in state income taxes. States can modify this number further with state-specific deductions and credits.
Items that are subtracted from your gross income to calculate your adjusted gross income are called adjustments to income, and you report them on Schedule 1 of your tax return when you file your annual tax return. Some of the more common adjustments are listed here, along with the separate tax forms on which some of them are calculated:
- Alimony payments.
- Penalties for early withdrawal of savings.
- Educator expenses.
- Employee Business Expenses for Armed Forces Reservists, Qualified Performing Artists, Fee-Based State or Local Government Officials, and Employees with Disability-Related Work Expenses (Form 2106).
- Health Savings Account (HSA) deductions (Form 8889).
- Moving expenses for members of the armed forces (Model 3903).
- SEP, SIMPLE and qualified plans for the self-employed.
- Self-employed health insurance deduction.
- Self-employment tax (the deductible part).
- Student loan interest deduction.
- Tuition and Fees (Form 8917).
Calculating Your Adjusted Gross Income (AGI)
If you use software to prepare your tax return, it will calculate your AGI once you enter your numbers. If you figure it out yourself, you’ll start by counting your reported income for the year. That could include employment income, as reported to the IRS by your employer on a W-2 form, plus any income, such as dividends and miscellaneous income, reported on 1099 forms.
Then, add any taxable income from other sources, such as gains from the sale of property, unemployment compensation, pensions, Social Security payments, or anything else that hasn’t been reported to the IRS. Many of these income items are also listed on IRS Schedule 1.
The next step is to subtract the applicable adjustments to the income listed above from your reported income. The resulting figure is your adjusted gross income. To determine your taxable income, subtract the standard deduction or your total itemized deductions from your AGI. In most cases, you can choose the one that gives you the most benefit.
For example, the standard deduction for 2020 tax returns for married couples filing jointly is $24,800 ($25,100 for 2021), so couples whose itemized deductions exceed that amount would generally choose to itemize, while others would simply take the standard deduction.
The IRS provides a list of itemized deductions and the requirements to claim them on its website. Your adjusted gross income also affects your eligibility for many of the deductions and credits available on your tax return. In general, the lower your AGI, the more deductions and credits you can claim, and the more you can reduce your tax bill.
An Example of Adjusted Gross Income (AGI) Affecting Deductions
Let’s say you had some major dental expenses during the year that weren’t reimbursed by insurance, and you decided to itemize your deductions. He is allowed to deduct the portion of those expenses that exceed 7.5% of his AGI.
This means that if you report $12,000 in unreimbursed dental expenses and have an adjusted gross income of $100,000, you can deduct the amount over $7,500, which is $4,500. However, if your adjusted gross income is $50,000, the 7.5% reduction is only $3,750 and you will be entitled to a deduction of $8,250.
Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)
In addition to AGI, some tax calculations and government programs require the use of what is known as your modified adjusted gross income or MAGI. This figure starts with your adjusted gross income and then adds certain items, like any deductions you take for student loan interest or tuition and fees.
Your MAGI is used to determine how much, if anything, you can contribute to a Roth IRA in a given year. 8 Also used to calculate your income if you apply for health insurance from the Marketplace under the Affordable Care Act (ACA).
Many people with relatively simple financial lives find that their AGI and MAGI are the same number or very close. If you file your taxes electronically, the IRS form will ask for your adjusted gross income from the previous year as a way to verify your identity.
You report your adjusted gross income on line 8b of the IRS 1040 form that you use to file your income taxes for the year. Keep that number handy after you complete your taxes because you’ll need it again if you file your taxes electronically next year. The IRS uses it as a way to verify your identity.
Also note that if your adjusted gross income is below a certain amount ($72,000 in 2020), you’re eligible to use the IRS Free File program to file your federal (and in some cases, state) taxes electronically for free.
What is adjusted gross income (AGI)?
AGI is essentially your income for the year after accounting for all applicable tax deductions. It’s an important number the IRS uses to determine how much you owe in taxes. AGI is calculated by taking your gross income for the year and subtracting any deductions you are eligible to claim. Therefore, your adjusted gross income will always be less than or equal to your gross income.
What are some of the common settings used when determining AGI?
There is a wide variety of adjustments that can be made when calculating AGI, depending on the financial and life circumstances of the filer. Also, since legislators can change tax laws, the list of available adjustments can change over time. Some of the most common adjustments used when calculating AGI include reductions for child support, student loan interest payments, and tuition costs for qualifying institutions.
What is the difference between adjusted gross income and modified adjusted gross income (MAGI)?
AGI and MAGI are very similar, except that MAGI add certain deductions. For this reason, MAGI would always be greater than or equal to AGI. Common examples of deductions that are added back to calculate MAGI include income earned abroad, income earned on US savings bonds, and losses from a publicly-traded company.