Adjusted Gross Income

What is an AGI number?

Adjusted Gross Income (AGI) is your total income minus certain adjustments allowed by the IRS. This includes your salary, dividends, capital gains, business income, retirement distributions, and other earnings. Adjustments can be for things like tuition, student loan interest, alimony, and retirement contributions. Your AGI will always be less than or equal to your total income and helps determine your tax liability.

The IRS allows certain adjustments to gross income to calculate AGI, which is used to determine taxable income.

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How AGI is calculated

Your AGI equals your total taxable income, including wages, self-employment earnings, dividends, and interest, minus eligible deductions or “adjustments.” It’s calculated before you take the standard or itemised deductions, which are reported later on your tax return.

Example of AGI calculation

Imagine you earned $80,000 from your job, $5,000 in dividends from investments, and $2,000 in interest from your savings account. This gives you a total gross income of $87,000.

Now, let's say you have the following adjustments:

  • $3,000 in student loan interest paid
  • $2,500 in contributions to a traditional IRA
  • $1,500 in self-employed health insurance premiums

Here's how you would calculate your AGI:

  1. Start with your total gross income:some text
    • $87,000
  2. Subtract your adjustments:some text
    • $3,000 (student loan interest)
    • $2,500 (IRA contributions)
    • $1,500 (health insurance premiums)

Total adjustments: $7,000

  1. Calculate your AGI:some text
    • $87,000 (gross income) - $7,000 (adjustments) = $80,000

So, your AGI for the year would be $80,000.

Your AGI is the total income minus specific adjustments, which the IRS uses to determine your taxable income. Lowering your AGI can reduce the amount of tax you owe, making it an important figure when preparing your tax return.

Common adjustments to income

Adjustments to income reduce your overall income to calculate your AGI. These adjustments, which can change yearly, often include the following:

  • Half of your self-employment taxes
  • Self-employed health insurance premiums
  • Alimony payments to a former spouse
  • Contributions to certain retirement accounts
  • Student loan interest paid

Similar reading: How do you implement the accrual accounting method in your startup?

In summary

Your AGI is your gross income adjusted for certain deductions allowed by the IRS. These specific deductions lower your taxable income, which can reduce the amount of tax you owe. Lowering your AGI can save you money at tax time, but not all adjustments apply to everyone.

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