Adjusted gross income is one of the most important numbers when it comes to taxes. While your taxable income is used to determine how much tax you owe on your federal income tax return, your AGI plays a role in determining whether you’re eligible for certain deductions or credits.
To calculate AGI, make sure you include all of your allowable adjustments so you don’t miss out on the many valuable tax write-offs.
What Is Adjusted Gross Income?
Your adjusted gross income is simply your total gross income minus certain adjustments. You can find these adjustments on Schedule 1 of Form 1040, under “Part II — Adjustments to Income.” After you enter your total income from all sources, subtract the cost of the following adjustments, if applicable, to reach your adjusted gross income:
- Educator expenses
- Certain business expenses if you’re a reservist, performing artist or fee-basis government official
- Health savings account contributions
- Moving expenses, for members of Armed Forces only
- Deductible portion of self-employment tax
- Self-employed SEP, SIMPLE and qualified plan contributions
- Self-employed health insurance
- Penalty on early withdrawal of savings
- Alimony paid
- IRA deduction
- Student loan interest
- Tuition and fees
Once you’ve added up your total deductions, you’ll transfer that figure to line 10a on the front page of your Form 1040.
How to Calculate Adjusted Gross Income
First, you’ll need to calculate your total income. This is your income from all sources, including wage income, salary, taxable interest and dividends, alimony, business income, IRA or pension distributions, annuity distributions, rental income, unemployment compensation, royalties, the taxable portion of Social Security benefits and other income. From this total income number, you’ll subtract your allowable adjustments to reach your AGI.
For example, let’s say you earned $60,000 in total income. You made a $2,000 deductible contribution to your IRA, paid $3,000 in student loan interest and had $5,000 in HSA contributions. In this case, your AGI would be $60,000 less $10,000 ($2,000 + $3,000 + $5,000) = $50,000. Keep in mind, AGI is different than your taxable income, which factors in additional deductions and exemptions.
Why Is AGI Important?
Now that you know the answer to, “What is AGI?”, find out why it matters. Your AGI determines whether you qualify for tax credits such as the Earned Income Tax Credit. For example, for the 2020 tax year, if you’re married filing jointly and have two qualifying children, your AGI must be $53,330 or below to qualify for the EITC. Without calculating your AGI accurately, you might overlook valuable tax deductions.
AGI also determines limits on itemized deductions and certain credits. For example, if you plan on deducting any of your medical expenses, they must exceed 7.5% of your AGI. Similarly, charitable contributions are generally limited to 50% of AGI.
It’s important to realize that your tax due is not based on your adjusted gross income. That honor goes to your taxable income, which is calculated by making additional adjustments after you compute your adjusted gross income.
What Is Modified Adjusted Gross Income?
Modified adjusted gross income adds back in some of the deductions you took to calculate your AGI, such as the student loan interest deduction, IRA contribution deduction and the tuition and fees deduction. MAGI is used to for purposes such as calculating whether or not you qualify to make a Roth IRA contribution. Note that there is not one all-encompassing standard MAGI calculation, although they are very similar. For example, the MAGI calculation for Roth IRA purposes includes traditional IRA deductions, whereas the calculation for traditional IRAs does not include those deductions.
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Last updated: Feb. 23, 2021