Glossary
Adjusted Gross Income

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.

Recommended Reading

The Rise of Non-Fungible Tokens (NFTs) and Taxation: What You Need to Know

Non-Fungible Tokens (NFTs) have revolutionized the digital asset market, enabling the buying, selling, and trading of unique digital items. As NFTs gain popularity, they also bring complex tax implications. This includes understanding how NFTs are classified (as property, collectibles, or other assets), how profits from NFT sales are taxed, and the importance of accurate record-keeping for compliance. Both creators and buyers must navigate these regulations to avoid penalties and optimize their tax strategies. Staying informed about NFT taxation is essential as this digital economy continues to evolve.

What is Revenue Recognition and Why It Matters for SaaS Businesses

Revenue recognition is the process of identifying when and how much revenue a business should record in its financial statements. For SaaS businesses, it’s crucial because their subscription-based model often involves recognizing revenue over time rather than upfront. Proper revenue recognition ensures compliance with accounting standards like ASC 606 or IFRS 15, provides accurate financial reporting, and builds trust with investors. Missteps can lead to financial discrepancies, legal issues, and damaged credibility.

Social, and Governance (ESG) Reporting: Integrating Sustainability into Bookkeeping Practices

ESG reporting focuses on integrating environmental, social, and governance practices into business operations. It enhances transparency, sustainability, and financial performance. Companies use ESG metrics to align financial reporting with sustainability goals. Real-world examples show how effective ESG practices build stakeholder trust. Adopting ESG reporting is essential for long-term growth and accountability.