Every year, taxpayers scramble for deductions to reduce their taxable income. But regardless of whether you itemize or claim the standard deduction, your final tax bill begins with one number: your adjusted gross income.
Your adjusted gross income, or AGI, is your gross income—the sum of all your income sources for the year—less certain above-the-line deductions allowed by the Internal Revenue Service. Your AGI is important because your eligibility for additional deductions and tax credits depends on this figure. It also determines your tax bracket and affects your ability to contribute to certain retirement accounts.
Here’s what you need to know about AGI, how it is calculated and how it impacts your finances.
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What is adjusted gross income?
Your adjusted gross income acts as a guidepost for several aspects of your finances. Your AGI determines whether you’re eligible for various tax credits during tax time.
While you can’t find AGI on the W2 your employer sent you, you’ll use your Form W-2 to help calculate AGI. To figure out your AGI, you’ll start with your gross income, which includes money received from your job—which you’ll find in Box 1 on your W-2 (total taxable wages)—plus additional income from capital gains, rental properties, stock dividends, unemployment benefits and retirement account distributions. The payer will send you a Form 1099 to document these types of miscellaneous payments.
For instance, if you earned $100,000 from your job, rental income of $10,000 and dividend income of $1,300, your annual gross income would be $111,300.
Keep in mind: Contributions to employer-sponsored retirement accounts such as a 401(k) or 403(b)s are already subtracted from your total income shown in W-2 Box 1, so there is no additional adjustment for them. Other paycheck deductions such as employer-sponsored health insurance premiums and transit benefits are also reflected in box 1.Once you’ve calculated your gross income, you’ll subtract what the IRS calls “adjustments to income” to reach your AGI. Common adjustments include, but are not limited to:
Common Adjustments to Gross Income
| Adjustment | 2023 adjustment amount (filed in 2024) | Eligibility |
|---|---|---|
| Educator expenses | $300 maximum | Eligible educators can deduct up to $300 in qualified expenses |
| Self-employed health insurance | Cost of health insurance premiums, limited to the net self-employment profit shown on the return reduced by the deduction for one-half of the self-employment tax | Self-employed persons filing a Schedule C |
| Penalties paid on early withdrawal of savings from deferred interest products | Amount of penalty paid | If you paid a penalty for early withdrawal of funds from a deferred interest product like a certificate of deposit |
| Alimony (pre-2019 divorces only) | Amount of alimony paid | Person paying alimony can deduct amount paid; person receiving alimony must claim alimony as income |
| Contributions to a traditional individual retirement account, IRA | $6,500 ($7,500 for those age 50+); maximum deduction cannot exceed total compensation for the year | Taxpayer must have compensation in the year claiming the deduction; contributions must be made by April tax filing date |
| Health Savings Account contributions | Adjustment calculated by filing Form 8889, Part 1 | Taxpayers with high deductible health insurance plans, who made qualified contributions to a HSA during the tax year |
| Student loan interest | The lesser of $2,500 or the sum of interest payments paid that year on a qualified student loan | For 2023, you can only take this full deduction if your modified AGI is less than $70,000 ($145,000 or more if you file a joint return). Deductions phase out if you make between $75,001 and $90,000 or 155,001 to $185,000, respectively. Taxpayers must also meet additional filing requirements |
| Unreimbursed moving expenses for military | Use Form 3903 to calculate adjustment | Move must be a permanent change of station and be allowable expenses |
To help put it all together, here’s an example to help break down gross income and your AGI after IRS adjustments.
Say you earned $125,000 last year from your job but had no additional taxable income. If you contributed $3,850 to your HSA and $6,500 to your traditional IRA (the maximums allowed in 2023 for people under 55 and 50, respectively), you could subtract $10,350 from your gross income to get an AGI of $114,650.
Here’s a tip: Your AGI will never be more than your gross income, and some taxpayers may find their gross income and AGI are the same. For instance, if you made $125,000 last year but didn’t make deductible HSA or IRA contributions, your AGI would be $125,000 if you weren’t eligible for additional adjustments.
How to calculate AGI
While you could whip out a calculator, there are simpler ways to calculate your AGI.
First, you can use tax software. These step-by-step programs will help you navigate your income sources and adjustments to calculate AGI and help identify potential tax credits along the way. Many programs offer audit protection for additional peace of mind, though that service typically has an additional fee.
You can also hire a tax professional to calculate your AGI and file your taxes. Your tax pro will ask you questions about your annual income and expenses to help calculate your AGI and potential tax credits. Generally speaking, the more complex your taxes, the higher your tax preparation fees will be.
AGI and state taxes
If you live in a state with a state income tax—or the District of Columbia—your AGI will also be used when filing your annual state tax return. Most states use the AGI from your federal return as a starting point for calculating your state income tax liability.
If you’re filing your return using tax software, most software will auto-fill your AGI and any other relevant information on your state return. If your state has a unique way of calculating taxable income, the software can also help you find that number.
AGI limits for 2023 tax credits
Once you know your AGI, you can see if you qualify for tax credits with AGI limits such as the earned-income tax credit and the saver’s tax credit. You can also determine your tax bracket. Because the IRS adjusts these annually for inflation, your 2023 tax bracket (paid in 2024) may be different from the tax bracket you can expect for 2024 taxes (paid in 2025).
2023 earned-income tax credit
The earned-income tax credit, or EITC, is designed to give low- and moderate-income workers tax relief, so it naturally has strict AGI income limits.
To qualify for the EITC for the 2023 tax year—paid in 2024—you can have no more than $11,000 in investment income and must have a total AGI that is no more than the following limits by filing status.
Earned Income Tax Credit AGI Maximums for 2023 Tax Year
| Number of eligible children/relatives | All filing statuses except joint filers | Joint filers |
|---|---|---|
| 0 | $17,640 | $24,210 |
| 1 | $46,560 | $53,120 |
| 2 | $52,918 | $59,478 |
| 3 | $56,838 | $63,398 |
For taxpayers who qualify, the maximum EITC is:
- No qualifying children: $600
- 1 qualifying child: $3,995
- 2 qualifying children: $6,604
- 3 or more qualifying children: $7,430
There is no additional tax credit for filers with four or more qualifying children.
2023 Saver’s Credit
Also known as the retirement savings contributions credit, the Saver’s Credit offers a tax break for contributions made to an eligible retirement account or Achieving a Better Life Experience (ABLE) account.
To qualify for the saver’s credit in the 2023 tax year, you must be 18 or older, not a student and not claimed as a dependent on someone else’s tax return. Single filers can claim up to $2,000 in contributions, and joint filers up to $4,000 and receive a credit for a percentage of those contributions based on AGI.
Saver’s Credit AGI Limits for 2023 Tax Year
| Credit | AGI limits for joint filers | AGI limits for head of household | AGI limits for all other filers |
|---|---|---|---|
| 50% of contribution | $43,500 or less | $32,625 or less | $21,750 or less |
| 20% of contribution | $43,501 - $47,500 | $32,626 - $35,625 | $21,751 - $23,750 |
| 10% of contribution | $47,501 - $73,000 | $35,626 - $54,750 | $23.751 - $36,500 |
| 0% of contribution | more than $73,000 | more than $54,750 | more than $36,500 |
As an example, say you’re a single filer with an AGI of $25,000, and you made a $1,000 contribution to a Roth IRA in 2023. You could claim 10% of that $1,000 contribution as a saver’s credit for a total tax credit of $100.
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What is modified adjusted gross income?
No conversation about adjusted gross income is complete without discussing modified adjusted gross income, or MAGI. Your MAGI generally equals your AGI before deducting student loan interest, and it’s important because it determines your eligibility for retirement contributions and some tax credits.
MAGI and retirement account contributions
To contribute the full amount to a Roth IRA, your 2023 MAGI must be below $138,000 for single filers and $218,000 for joint filers. Those earning more are subject to contribution limits and lose the ability to make any Roth IRA contributions once MAGI reaches $153,000 for single filers and $228,000 for joint filers.
MAGI and 2023 tax year credits
MAGI is also used to figure out your eligibility for many popular tax credits, including:
- Adoption credit (for qualified adoption-related expenses)
- American opportunity tax credit (for undergraduate tuition and education expenses)
- Child tax credit (for qualifying child care-related expenses)
- Lifetime learning credit (for undergraduate, graduate and vocation tuition and fees)
Eligibility for each of these credits has three tiers:
- A floor, where you can claim the full tax credit if your MAGI is below a certain amount
- A phaseout range, where you can only claim a partial credit
- A maximum, where you can no longer claim the credit
To see these ranges in action, here’s a look at the four tax credits mentioned above and their three MAGI ranges.
Popular Tax Credits and MAGI Ranges for 2023 Tax Year
| Maximum tax credit | You can claim the full credit if your MAGI is less than… | Can only claim partial credit if MAGI is between… | Not eligible for tax credit if MAGI is equal to or more than… | |
|---|---|---|---|---|
| Adoption credit | $15,950 | $239,230 | $239,231 - $279,229 | $279,230 |
| American opportunity tax credit | $2,500 per eligible student | $80,000 or less for single filers, $160,000 or less for joint filers | $80,001 - $90,000 for single filers, $160,001 - $180,000 for joint filers | $90,001 for single filers, $180,001 for joint filers |
| Child tax credit | $2,000 per child | $200,000 for all filing status except joint, $400,000 for joint filers | Tax credit reduced by $50 for every whole or part of $1,000 that MAGI exceeds these amounts. | No upper limit, but phase-out can reduce tax credit to $0 |
| Lifetime learning credit | $2,000 | Less than $80,000 for single filers, less than $160,000 for joint filers | $80,000 - $89,999 for single filers, $160,000 - $179,999 for joint filers | $90,000 for single filers, $180,000 for joint filers |
It’s important to note that MAGI calculations can vary by tax benefit, so review the instructions for each tax credit.
More on Taxes
- What Is the Standard Deduction?
- When Is Tax Day 2023?
- What Are the New Tax Brackets for 2023?
Meet the contributor
E. Napoletano
E. Napoletano is a contributor to Buy Side from WSJ.
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