Adjusted Gross Income (AGI) Definition

What Is Adjusted Gross Income (AGI)?

Adjusted gross income (AGI) is the figure that the Internal Revenue Service (IRS) uses to determine your income tax liability for the year. It is calculated by subtracting certain adjustments from gross income, such as business expenses, student loan interest payments, and other expenses. After calculating a taxpayer’s AGI, the next step is to subtract deductions to determine their taxable income.

The IRS also uses other income metrics, such as modified AGI (MAGI), for specific programs and retirement accounts.

Key Takeaways

  • The IRS uses your adjusted gross income (AGI) to determine how much income tax you owe for the year.
  • AGI is calculated by taking all of your income for the year (your gross income) and subtracting certain adjustments to income.
  • Your AGI can affect the size of your tax deductions as well as your eligibility for some types of retirement plan contributions, such as a Roth individual retirement account (Roth IRA).
  • Modified adjusted gross income (MAGI) is your AGI with some otherwise-allowable deductions added back in. For many people, AGI and MAGI will be the same.
  • Among the items subtracted from your gross income when calculating your AGI are alimony payments and educator expenses.

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Understanding Adjusted Gross Income (AGI)

As prescribed in the United States tax code, AGI is a modification of gross income. Gross income is simply the sum of all the money you earned in a year, which may include wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement distributions, before tax or other deductions. AGI makes certain adjustments to your gross income to reach the figure on which your tax liability will be calculated.

Many U.S. states also use the AGI from federal returns to calculate how much individuals owe in state income taxes. States may modify this number further with state-specific deductions and credits.

The items subtracted from your gross income to calculate your AGI are referred to as adjustments to income, and you report them on Schedule 1 of your tax return when you file your annual tax return. Some of the most common adjustments are listed here, along with the separate tax forms on which a few of them are calculated:

  • Alimony payments
  • Early withdrawal penalties on savings
  • Educator expenses
  • Employee business expenses for armed forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses (Form 2106)
  • Health Savings Account (HSA) deductions (Form 8889)
  • Moving expenses for members of the armed forces (Form 3903)
  • Self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
  • Self-employed health insurance deduction
  • Self-employment tax (the deductible portion)
  • Student loan interest deduction

Calculating Your Adjusted Gross Income (AGI)

If you use software to prepare your tax return, it will calculate your AGI once you input your numbers. If you calculate it yourself, you’ll begin by tallying your reported income for the year. That might include job income, as reported to the IRS by your employer on a W-2 form, plus other income, such as dividends and miscellaneous income, reported on 1099 forms.

Next, you add any taxable income from other sources, such as profit on the sale of a property, unemployment compensation, pensions, Social Security payments, or anything else that hasn’t already been reported to the IRS. Many of these income items are also listed on IRS Schedule 1.

The next step is to subtract the applicable adjustments to the income listed above from your reported income. The resulting figure is your AGI. To determine your taxable income, subtract either the standard deduction or your total itemized deductions from your AGI. In most cases, you can choose whichever gives you the most benefit.

For example, the standard deduction for tax returns for married couples filing jointly is $25,100 in 2021 and $25,900 in 2022, so couples whose itemized deductions exceed that amount would generally opt to itemize, while others would take the standard deduction.

The IRS provides a list of itemized deductions and the requirements for claiming them on its website. Your AGI also affects your eligibility for many of the deductions and credits available on your tax return. In general, the lower your AGI, the more significant the number of deductions and credits you will be eligible to claim, and the more you’ll be able to reduce your tax bill.

An Example of Adjusted Gross Income (AGI) Affecting Deductions

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.

This means that if you report $12,000 in unreimbursed dental expenses and have an AGI of $100,000, you can deduct the amount that exceeds $7,500, which is $4,500. However, if your AGI is $50,000, the 7.5% reduction is just $3,750, and you’d be entitled to an $8,250 deduction.

Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)

In addition to AGI, some tax calculations and government programs call for using what’s known as your modified adjusted gross income, or MAGI. This figure starts with your AGI, then adds back certain items, such as any deductions you take for student loan interest or tuition and fees.

Your MAGI is used to determine how much, if anything, you can contribute to a Roth individual retirement account (Roth IRA) in any given year. It is also used to calculate your income if you apply for Marketplace health insurance under the Affordable Care Act (ACA).

Many people with relatively uncomplicated financial lives find that their AGI and MAGI are the same number or very close.

If you file your taxes electronically, the IRS form will ask you for your previous year’s AGI as a way of verifying your identity.

Special Considerations

You report your AGI on line 11 of IRS Form 1040, which is the form you use to file your income taxes for the year. Keep that number handy after completing your taxes, because you will need it again if you e-file your taxes next year. The IRS uses it as a way to verify your identity.

Also, note that as of January 2022, almost anyone may use the IRS Free File program to file their federal (and, in some cases, state) taxes electronically at no charge.

What does adjusted gross income (AGI) mean for tax payments?

Adjusted gross income (AGI) is essentially your income for the year after accounting for all applicable tax deductions. It is an important number that is used by the Internal Revenue Service (IRS) to determine how much you owe in taxes. AGI is calculated by taking your gross income from the year and subtracting any deductions that you are eligible to claim. Therefore, your AGI will always be less than or equal to your gross income.

What are some common adjustments used when determining AGI?

There are a wide variety of adjustments that might be made when calculating AGI, depending on the financial and life circumstances of the filer. Moreover, since the tax laws can be changed by lawmakers, the list of available adjustments can change over time. Some of the most common adjustments used when calculating AGI include reductions for alimony and student loan interest payments.

What is the difference between AGI and modified adjusted gross income (MAGI)?

AGI and modified adjusted gross income (MAGI) are very similar, except that MAGI adds back certain deductions. For this reason, MAGI would always be larger than or equal to AGI. Common examples of deductions that are added back to calculate MAGI include foreign earned income, income earned on U.S. savings bonds, and losses arising from a publicly traded partnership.

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