Adjusted Gross Income (AGI) is a financial term used to describe a taxpayer’s total income minus specific deductions. AGI is calculated by taking your gross income (total income from all sources) and subtracting any allowable tax deductions. This number is then used to determine how much of your income is subject to tax, and which tax bracket you fall into.
Put another way, your adjusted gross income is your total income minus specific deductions that are allowed by the tax laws. This adjusted number is then used to determine how much of your income is taxable.
What is adjusted gross income used for?
AGI is used to calculate your taxes, determine your eligibility for tax credits and deductions, evaluate loan qualification, aid in financial planning, and to determine eligibility for certain benefits like health savings accounts and Medicare premium calculations. Looking at income alone doesn’t give lenders and creditors a full picture of your financial well-being, and AGI is used to paint a more complete picture.
Tax calculations: AGI is used to determine how much of your income is taxable. The higher your AGI, the more of your income is subject to tax, and the more you may owe in taxes.
Eligibility for tax benefits and deductions: AGI is used to determine your eligibility for certain tax benefits and deductions, such as contributions to a traditional IRA, student loan interest deductions, and the child tax credit.
Financial planning: AGI can be a useful tool for financial planning. By knowing your AGI, you can get a better idea of your taxable income and plan your finances accordingly.
Loan Qualification: Lenders may use AGI to determine if you’re eligible for certain loans (like mortgages), and to calculate your debt-to-income ratio.
Health savings accounts: AGI is used to determine your eligibility for contributions to a health savings account (HSA).
Medicare premium calculation: AGI is also used to determine the amount of your Medicare premiums.
How do I calculate my adjusted gross income?
Calculating your AGI is simple. Follow the steps below:
Step 1. Calculate your gross income first: This includes all sources of income such as wages, salaries, tips, investment income, dividends, personal items sold for a profit, and self-employment income.
Step 2. Determine your allowable deductions: Some common deductions include student loan interest, alimony payments, and contributions to a traditional IRA. (also read: Common Tax Deductions & Credits)
Step 3. Subtract your allowable deductions from your gross income: This gives you your AGI. It’s as simple as that.
Where can I view my AGI on my tax return?
You can find your adjusted gross income on your IRS Form 1040. For your federal tax return, your AGI will be on line 11 of your Form 1040.
AGI vs MAGI
AGI is used to determine a taxpayer’s taxable income, while MAGI is used to determine a taxpayer’s eligibility for certain tax benefits and subsidies. MAGI is basically your AGI with some deductions added back in, like your student loan interest.
Adjusted Gross Income (AGI) is your income after deducting certain expenses from your gross income. AGI is only used as a starting point for calculating federal income taxes and determining eligibility for certain tax benefits and deductions.
Modified Adjusted Gross Income (MAGI), on the other hand, is a modified version of AGI that is used to determine a taxpayer’s eligibility for certain tax benefits and subsidies, such as the premium tax credit and Medicaid. MAGI takes AGI and adds back in certain deductions and exclusions, such as foreign income, student loan interest, and tax-free interest, to give a more comprehensive picture of your financial situation.