When you’re preparing your taxes or gathering information to send to your tax preparer, you may read a lot about adjusted gross income. It’s a term that comes up often when preparing taxes. If you aren’t sure what your AGI is or how to calculate it, you can learn more about adjusted gross income and how it is determined.
To determine your adjusted gross income, you must first calculate your gross income.
Gross Income
Your gross income is the total amount of money you earn before any deductions are made. Deductions include items such as:
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Federal, state and income taxes
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Social Security and Medicare deductions
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Local taxes, if applicable
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Health insurance premiums
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Retirement plan contributions
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Wage garnishments
Beyond the income your employer reports to the IRS on your W-2 form, gross income includes earnings reported on IRS 1099 forms. Other revenues may consist of dividends, alimony, business income, capital gains or other sources.
Lenders may look at your gross income to determine how much you can borrow.
Adjusted Gross Income
Your adjusted gross income is gross income minus certain payments the IRS does not include in taxable income. If you want to estimate AGI for yourself, you can start with all the income you earn from the sources listed above, plus any other income you have. Other sources may include real estate, Social Security, pensions or unemployment payments.
Once you determine your gross income, you can subtract:
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Tuition and fees
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Interest from student loans
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Self-employment tax and health insurance
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IRA plans for self-employed workers like SIMPLE and SEP
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Moving expenses for military members
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Health Savings Account deductions
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Business expenses for employees with work-related impairment costs
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Expenses for qualified performing artists, some state or local government officials, members of the armed forces reserve
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Savings early-withdrawal penalties
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Educator expenses
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Alimony payments
If you use software to prepare your taxes, it will calculate your adjusted gross income for you. You can also obtain your AGI from a tax preparation service.
Uses of Adjusted Gross Income
Your adjusted gross income is the basis for determining your tax responsibility. Once you’ve specified your AGI, allowable deductions and adjustments are made to determine your taxable amount.
AGI determines whether you qualify for certain credits and deductions. One example is the medical expenses deduction. If your unreimbursed medical expenses are more than 7.5% of your adjusted gross income, you may be able to deduct medical expenses such as:
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Payments to medical practitioners, including physicians, chiropractors, dentists, psychologists, psychiatrists and others
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Addiction programs, including smoking cessation
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Prescription drugs, including insulin
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Hospital care
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Nursing home care
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Transportation costs you incur getting to and from medical care
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Dentures and hearing aids
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Contact lenses and glasses, including reading glasses
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Medical conferences to learn about conditions you, your dependents or spouse have (lodging and meals are not covered)
Another possible deduction is the Earned Income Tax Credit. If your adjusted gross income falls below a certain amount, you may qualify depending on how much you earn, your marital status and how many children you have.
If your adjusted gross income is under a certain amount, you can use the Free File program offered by the IRS. For no charge, you can file your federal taxes electronically. In some states, you can also use it to file your state taxes.
Modified Adjusted Gross Income
Some government programs and tax calculations need to know your modified adjusted gross income. This amount is your adjusted gross income with certain deductions and tax-exempt interest income added back in. The Internal Revenue Service uses MAGI to determine if you are eligible to contribute to a Roth IRA and if you can deduct your traditional IRA contributions if you or your spouse have a workplace retirement plan. MAGI is also used to determine if you’re eligible for the premium tax credit.
Because your adjusted gross income is vital to determining how much you pay in taxes and what credits and deductions you’re eligible for, it’s good to know how to calculate your AGI. A little knowledge can go a long way toward making you savvier about your financial situation.
