You’ll see the term “adjusted gross income (AGI)” repeated throughout your tax forms. To get your adjusted gross income, you’ll subtract from your gross income — which includes wages, dividends, alimony, capital gains and retirement distributions — certain payments you’ve made during the year, such as alimony, moving expenses, student loan interest or contributions to a traditional individual retirement account.
The result — your AGI — becomes the starting point for calculating your tax bill. From there, you’ll subtract your allowable exemptions, credits and deductions to find the amount on which you’ll pay tax: That’s your taxable income.
If you have to file a state tax return, it typically also will use your federal AGI as a starting point. Credits and deductions specific to your state then figure in to determine your state taxable income.
Finally, AGI is the basis for many deductions and credits. For example, you can deduct unreimbursed losses from a fire or theft, but only when the losses are more than 10% of your AGI. The lower your AGI, the greater the deduction.
If you file taxes online, the software will calculate your AGI for you.
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Available adjustments vary by tax form
Only taxpayers who file Form 1040 have access to the full extent of credits and deductions that lower AGI, such as after-tax contributions to your Health Savings Account and certain moving expenses.
If you file Form 1040A, you still have access to some adjustments. Although these are subject to change year to year, available adjustments tend to include things like:
If you file Form 1040EZ, you can’t make any adjustments; your total gross income and your AGI are the same.
(In addition to AGI adjustments, there are other considerations that determine which tax form to use.)
How AGI is used when calculating taxes
Some of the itemized deductions you can claim when filing Form 1040 or Form 1040A may be limited by your AGI amount. Medical and dental expenses, for example, can be deducted only for amounts above 10% of your AGI. In other words, a lower AGI establishes a lower threshold for deductible costs.
AGI limits also apply to the miscellaneous itemized expenses category.
In one of the ironies of the tax code, even your income adjustments are subject to AGI limitations. For example, how much tuition you can deduct depends on your modified adjusted gross income, or MAGI. And calculating MAGI can reduce or eliminate adjustments to your AGI.
What is Modified AGI, or MAGI?
If you’re filing Form 1040 and itemizing deductions, such as tax-exempt interest or Social Security benefits, you also have to calculate your MAGI. The calculation will add some of these amounts back in. Then MAGI acts as a baseline for determining the phaseout level of some credits and tax saving strategies.
If you’re filing Form 1040A, however, your MAGI is the same as your AGI.
Updated June 16, 2017