Adjusted Gross Income

Adjusted gross income is defined as gross income less modifications to income (AGI). Your earnings, dividends, capital gains, company revenue, retirement payouts, and other sources of income are all included in your gross income . Adjustments to income can be made for things like tuition costs, interest on student loans, alimony payments, and contributions to retirement accounts. Your AGI will never be more than your Gross Total Income on your return and, in some cases, may be lower. It is the figure that the Internal Revenue Service (IRS) uses to determine your income tax liability for the year.

Understanding Adjusted Gross Income (AGI)

AGI is a modification of gross income as specified by the US tax code. The total of your annual earnings, which may include wages, dividends, capital gains, interest, royalties, rental income, alimony, and other types of income, is known as your gross income and retirement distributions, before tax or other deductions. Your gross income is subject to a number of adjustments by AGI in order to determine the amount from which your tax liability will be determined..

AGI Calculation

It is equal to your reported total taxable income, which includes wages from a job, self-employment, dividends, and interest from a bank account, less certain deductions, or “adjustments” that you’re eligible to take.

Your AGI is calculated before you take the standard or itemized deductions —which you report in later sections of your tax return.

Example Of An AGI Calculation

Let’s say you had some significant dental expenses during the year that weren’t reimbursed by insurance, and you’ve decided to itemize your deductions. You are allowed to deduct the portion of those expenses that exceed 7.5% of your AGI.12

As a result, if you declare $12,000 in unreimbursed dental expenses and have an AGI of $100,000, you can deduct $4,500 of the excess over $7,500. You would be able to deduct a bigger portion of the $12,000, in this case $8,250, if your AGI was $50,000 as opposed to $50,000, where the 7.5% reduction is just $3,750.Adjustments to income

Adjustments to income are particular deductions that are used to calculate your AGI by reducing your overall income. The types of adjustments that you can deduct are subject to change each year, but several of them consistently show up on tax returns year after year. Some of these adjustments include:

  • Your self-employment taxes are split in half.
  • Self-employed health insurance premiums
  • Alimony payments that are made to a former spouse
  • Contributions to certain retirement accounts
  • Student loan interest paid

Conclusion

Your gross income is adjusted for certain qualifying deductions that the Internal Revenue Service permits to get your adjusted gross income, or AGI (IRS). These qualifying deductions lower a person's gross income, which lowers the amount of taxable income the person will ultimately be required to pay taxes on. Lowering your AGI can help you save money at tax time by reducing your taxable income. However, many of the AGI modifications that are permitted are tailored to situations that might not apply to everyone.

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