What Is Adjusted Gross Income (AGI)?
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Your AGI plays a role in calculating your taxable income.
Adjusted gross income can help to determine your eligibility for certain tax credits.
To calculate your AGI, you reduce your gross income by subtracting certain qualified payments, such as student loan interest.
What is adjusted gross income (AGI)?
Adjusted gross income, or AGI, is an important number that the IRS uses as a basis to help calculate how much you owe in taxes.
The IRS defines AGI as gross income, minus certain adjustments to that income. You can determine your AGI by calculating your annual income from wages and other sources, then subtracting certain types of payments you've made during the year. These adjustments can include student loan interest, retirement savings, or health savings account contributions.
Once you have your adjusted gross income, you can use that number to determine your taxable income by finding deductions that can further reduce your liability. Your AGI can also help you figure out which tax credits might be able to save you money.
How is adjusted gross income calculated?
In general, the formula for calculating AGI includes income from:
Jobs.
Investments.
Social Security.
Pensions.
Businesses.
Real estate.
Farms.
Unemployment.
And then subtract:
Educator expenses.
Certain business expenses.
Deductible HSA contributions.
Moving expenses for military.
Deductible self-employment taxes.
Contributions to retirement plans or health insurance for self-employed people.
Penalties on early withdrawals of savings.
Alimony paid.
Deductible IRA contributions.
Student loan interest.
Deductible tuition and fees.
Tax software or your tax preparer will calculate your adjusted gross income as part of the process of preparing your tax return.
Where is AGI on a tax return?
You can find your adjusted gross income right on your IRS Form 1040. On your federal tax return, your AGI is usually on line 11 of your Form 1040.
The significance of adjusted gross income
Your AGI is often the starting point for calculating your tax bill. From there, you’ll make various adjustments and subtract your allowable deductions to find the amount on which you’ll pay tax: That's your taxable income. You’ll see the term “adjusted gross income (AGI)” repeated throughout your tax forms.
AGI is also the basis on which you might qualify for many deductions and credits. For example, you may be able to deduct unreimbursed medical expenses, but only when they're more than 7.5% of your AGI. So the lower your AGI, the greater the deduction.
Your state tax return might also use your federal AGI as a starting point. If you file taxes online, your software will calculate your AGI.
What is your modified adjusted gross income (MAGI)?
According to the IRS, for most taxpayers, modified adjusted gross income, or MAGI, is simply adjusted gross income before subtracting deductible student loan interest.
If you’re filing Form 1040 and itemizing so that you can take certain deductions, you may have to calculate your MAGI. It can also be a baseline for determining the phaseout level of some credits and tax-saving strategies, and sometimes the formula for MAGI can depend on the type of tax benefit it applies to.
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