When preparing your taxes, you’ll notice the term “adjusted gross income,” also referred to as AGI, repeated on your tax forms. While many of us know what gross income and taxable income are, adjusted gross income is a term you may not be as familiar with, so we’ll break it down for you on what it is and how to calculate it.
What is Adjusted Gross Income (AGI)?
Think of your AGI as sandwiched between your gross and taxable income. You start with your gross income, then after you make “adjustments,” you get your adjusted gross income. Then you subtract your deductions and exemptions from your AGI, and you end up with your taxable income.
According to the IRS:
Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income.
Therefore, adjusted gross income is your income calculated from your gross income, which is used to determine how much of your income is taxable. Your AGI is used for many purposes when filing your taxes, including determining your eligibility to take certain deductions.
What are Adjusted Gross Income Deductions?
The deductions you can take to calculate your AGI are referred to as adjustments to income. Some of these deductions, with exceptions and limits, typically include:
- Certain retirement plan contributions
- Unreimbursed business expenses
- Half of the self-employment tax
- Medical expenses
- Healthcare savings account deductions
- Alimony (included in the recipient’s gross income)
- Losses incurred from the sale or exchange of property
- Early-withdrawal penalties levied by financial institutions
- School tuition, fees and student loan interest
- Some business-related expenses incurred by performing artists, teachers, fee-basis government officials, and reservists
How to Calculate Adjusted Gross Income (AGI)
To calculate your individual AGI, begin by tallying your reported income from wages, dividends, alimony, capital gains, interest income, royalties, rental income and retirement distributions. Then add other possible sources of income including the sale of a property, unemployment compensation, and Social Security payments.
From that total, subtract the applicable deductions and payments made from the list above. After those have been deducted from your gross income, the result is your AGI, which serves as the starting point for figuring out your taxable income.
Once your AGI is determined, you then apply the standard federal tax deductions to reach your taxable income or, if eligible, you can itemize your expenses and receive itemized deductions instead.
The lower your AGI, the greater the deductions and credits you’ll be eligible to receive. For example, if you itemize deductions and report medical expenses, you must reduce the total expense by 7.5 percent of your AGI for the 2018 tax year. Therefore, if you report $10,000 in medical costs and an AGI of $100,000; you must reduce your deduction by $7,500. But if your AGI is $50,000, the reduction is only $3,250.
As of Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.
What is Modified AGI or MAGI?
On your tax return, you’ll notice that the IRS also uses modified adjusted gross income or MAGI. This refers to modifying your AGI even further to determine other applicable deductions. Many people will have no applicable deductions to add back, so their MAGI will be the same as their AGI. If these deductions do apply to you, MAGI is calculated by adding back certain items such as foreign earned income, tax-exempt interest, and the excluded portion of Social Security benefits.
Reporting Adjusted Gross Income (AGI) on Form 1040
Adjusted gross income is reported on IRS Form 1040 – the U.S. Individual Income Tax Return. Before 2018, there were various 1040 versions, but now the new 1040 form is used by all filers for reporting income, deductions, credits.
You can get a quick estimate of your AGI by looking at line 37 on your Form 1040. If filing using the Married-Filing Jointly option, the $66,000 AGI limitation applies to both spouses combined.
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