Key Takeaways
- Your adjusted gross income (AGI) is your taxable income after subtracting deductions from your gross income.
- AGI is used to determine any deductions and credits you might qualify for and, ultimately, how much in taxes you will have to pay.
- Your AGI is calculated before you take itemized or standard deductions.
How Adjusted Gross Income Works
When filing your taxes, your adjusted gross income is your gross income minus any adjustments. AGI is used in many tax calculations and thresholds—like credits and deductions— which is important because the lower your AGI, the less tax liability you'll have.
To find AGI, after you have added up your full taxable income (gross income), you can take several "above-the-line" deductions to lower that taxable amount. These are called "above the line" because they apply whether you itemize your deductions or take the standard deduction. The standard deduction is an amount that the IRS sets each year that you can deduct from your taxable income, meaning a portion of your income isn't taxed, lowering your tax bill.
In other words, if you had specific expenses or saved money to a qualified account, the IRS allows you to deduct the amounts from your gross income to produce your adjusted gross income (AGI). These deductions are also called "adjustments to income," and they're calculated on IRS Schedule 1.
Example of Adjusted Gross Income
Let's say you are a school teacher who earned $40,000 in gross income from your salary. However, during the year, you purchased $2,000 worth of classroom supplies. You also contributed $1,500 to your individual retirement account (IRA).
Educator expenses and IRA contributions qualify as a deduction to your taxable income, meaning they can be deducted as an expense. As a result, your AGI would be calculated as follows:
- $40,000 gross income - $2,000 in educator supplies - $1,500 IRA contribution
- AGI = $36,500
Using adjustments to your gross income—commonly called deductions—allows you to lower how much of your income is taxed, potentially resultingin a tax refund.
Note
Adjustments to income are deducted from your gross income. Itemized or standard deductions are then deducted from your AGI to arrive at your final taxable income.
Types of Adjustments to Income
Your AGI is calculated on the first page of your U.S. federal tax return (Form 1040) using information from Schedule 1. Calculating AGI is an important first step because it serves as the foundation for determining the deduction and credits for which you may qualify and the income tax you owe. To determine your AGI, start with your gross income and subtract qualifying items to reduce the amount. Common items can include:
- Educator expenses, such as supplies paid for by teachers
- Moving expenses for members of the armed forces
- Health savings account deduction
- Student loan interest
- Contributions to certain retirement accounts
- SEP-IRA, SIMPLE IRA, and 401(k) deductions for the self-employed
- Penalties from financial institutions for early withdrawal of savings
- Alimony payments
If you're doing your own taxes, tax software can automatically calculate your AGI. The use of tax software can help avoid mathematical errors since it will perform the tax calculations as it walks you through the tax interview. Otherwise, if you don't understand the difference between AGI and gross income or how to calculate it, you may pay more than you should in income taxes.
Adjusted Gross Income vs. Gross Income
Before you calculate your adjusted gross income, you must determine your gross income—the total income on Form 1040—that you earned for the tax year in which you're filing. Gross income includes all money you have made on your paychecks before payroll taxes. However, it isn't limited to your paycheck—it includes money you earn from other sources, too.
Gross income can include other employment earnings in addition to salaries (bonuses, for example), as well as interest and dividends, long- and short-term capital gains and losses, interest, dividends, alimony, pensions and annuities, rental property income, royalties, and any revenue derived from operating a business.
Also, if yousold any items on eBay, Craigslist, or another online store, you have gained income from profits by selling goods. Gross income also includes net gains on the disposal of assets, such as selling a home or car, or any money obtained through self-employment, consulting, side jobs, andother sources of income. All of these income sources are accounted for on the first few lines of Form 1040 and Part I of Schedule 1.
Note
It's important not to confuse gross income with net income. Net income refers to take-home pay or the amount of money earned after payroll withholding, such as state and federal income taxes, Social Security taxes, and pretax benefits like health insurance premiums.
The list of items that contribute to your total gross income is extensive, and you may need help determiningwhat's consideredincome for this purpose.Tax software will help you identify all earnings that need to be reported to the government by asking questions in the tax interview, or you can ask an accountant for advice.
Frequently Asked Questions (FAQs)
What is included in adjusted gross income?
Your AGI is an adjustment of your gross income, so it includes all sources of income (wages, dividends, capital gains, business income, retirement distributions, etc.), but it then reduces the full amount with any above-the-line adjustments you are eligible for. These will depend on your situation but may include educator expenses, student loan interest, alimony payments, or contributions to a retirement account.
Are AGI and taxable income the same thing?
No, but your AGI is a step on the way to reaching your taxable income. Once you have taken adjustments from your gross income to reach your AGI, you can then apply credits and deductions to reach your taxable income.
FAQs
The AGI calculation is relatively straightforward. It is equal to the total income you report that's subject to income tax—such as earnings from your job, self-employment, dividends and interest from a bank account—minus specific deductions, or “adjustments” that you're eligible to take.
Is adjusted gross income before or after taxes? ›
Gross income is the entire amount of money an individual earns, including wages, salaries, bonuses, and capital gains. Adjusted gross income (AGI) is an individual's taxable income after accounting for deductions and adjustments. Net income for companies is the profit after accounting for all expenses and taxes.
Why is my adjusted gross income higher than my income? ›
Your adjusted gross income (AGI on Line 11 of Form 1040) is generally higher than your taxable income (Line 15 of Form 1040). Your AGI includes everything, and then you take either the standard or itemized deductions to lower your AGI to taxable income.
Is earned income the same as adjusted gross income? ›
AGI. You calculate your final, adjusted gross income using gross income. Although gross income includes earned income, you make any adjustments after calculating the total amount of your earnings. Some adjustments may apply to your earned income, like retirement fund deductions from your paycheck.
How to calculate adjusted income? ›
Work out your adjusted income
Start with your net income for the tax year. Add the amounts of claims made for tax relief on pension savings where they were paid before tax relief was given. For example, because your pension scheme was not set up for automatic relief or someone else paid into your pension.
How do I calculate my adjusted gross score? ›
To determine your Adjusted Gross Score (AGS), total up the number of strokes taken during a round, then adjust for the maximum per-hole scores (determined by the USGA's Equitable Stroke Control guidelines). Most golf courses make the information on maximum per-hole scores available to the general public.
What is an example of adjusted gross income? ›
Your adjusted gross income (AGI) is your total (gross) income from all sources minus certain adjustments such as educator expenses, student loan interest, alimony payments and retirement contributions.
Is social security considered gross income? ›
It's not taxed but it goes into the calculation. At least half your Social Security benefits will be considered taxable income if that total exceeds the minimum taxable levels. You must then take the standard or itemize deductions to arrive at your net income.
How to calculate modified adjusted gross income? ›
To calculate your modified adjusted gross income, take your AGI and "add-back" certain deductions. Many of these deductions can be rare, so it's possible your AGI and MAGI can be identical. Different credit and deductions can have differing add-backs for your MAGI calculation.
How do you calculate adjusted gross income from paystub? ›
First, calculate gross income by adding together wages, tips, and taxable distributions. Next, deduct the other payments, contributions, and expenses from gross income to calculate AGI.
To boil it down, it's simply your total gross income minus specific tax deductions. Some common examples of eligible deductions that reduce adjusted gross income include deductible traditional IRA contributions, health savings account contributions, and educator expenses.
Why is the IRS saying my adjusted gross income is wrong? ›
If your return was rejected for an AGI or PIN mismatch, it means that what you entered doesn't match their records. The IRS only requires one of these to match their records to get accepted. Most people use their prior year AGI.
Is adjusted gross income your actual income? ›
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or "adjustments" to income that you are eligible to take. Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
How to estimate adjusted gross income? ›
You can determine your AGI by calculating your annual income from wages and other income sources (gross income), then subtracting certain types of payments, such as student loan interest, alimony, retirement contributions, or health savings account contributions, you've made during the year.
Is Social Security considered earned income? ›
Unearned Income is all income that is not earned such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, dividends, and cash from friends and relatives. In-Kind Income is food, shelter, or both that you get for free or for less than its fair market value.
Can I calculate my AGI from my W2? ›
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.
How do I get my AGI from last year? ›
How to Locate Your Previous Year AGI If You Don't Have Access to Your Return
- View or download a transcript of your return online at www.irs.gov.
- Go to www.irs.gov and request a hard copy transcript of your return be mailed to you. ...
- Call the IRS at 800-908-9946 and request a hard copy transcript be mailed to you.
Most pay stubs have a line marked gross income, which includes not only your take-home pay but also any deductions that were taken out of your paycheck. This figure is the starting point for calculating AGI. Elsewhere on your pay stub, you'll see deductions for various items.
Does standard deduction reduce AGI? ›
Itemized deductions (and the standard deduction) are dollar amounts that are deducted from your AGI. Your gross income is the total amount of money you earn during a tax year, including salaries, wages, tips, self-employment income, and investment income among others.
