Understanding Adjusted Gross Income (AGI)

Adjusted Gross Income (AGI) is a crucial figure in determining your US federal income tax liability. Learn how to calculate it and its significance.
Pencil rider navigating tax calculation landscape

Understanding Adjusted Gross Income (AGI)


Adjusted Gross Income (AGI)is a crucial figure in determining your US federal income tax liability. It represents your total gross income less certain allowable deductions, called adjustments to income. Understanding AGI is essential for accurately filing your taxes and determining eligibility for various tax benefits.


Components of Gross Income

Gross income encompasses all your income from various sources. This includes wages, salaries, tips, dividends, interest, capital gains, rental income, business profits, and other forms of income. For a complete list of what constitutes gross income, refer to the official IRS guidelines here.


Adjustments to Income

Adjustments to income are specific deductions that reduce your gross income. These are different from the standard deduction or itemized deductions you take later in the tax process. Common examples include contributions to traditional IRAs, student loan interest payments, and one-half of self-employment taxes paid. A comprehensive list of allowable adjustments can be found in the IRS instructions for Form 1040, Schedule 1: IRS Form 1040 Instructions (Schedule 1).


Calculating AGI

The calculation of AGI is straightforward: AGI = Gross Income - Adjustments to Income. For example, if your gross income is $70,000 and you have $2,000 in allowable adjustments, your AGI is $68,000.


Significance of AGI

Your AGI is more than just a number; it is a critical factor in determining your tax liability. Many tax deductions and credits are based on your AGI, impacting the amount of taxes you ultimately owe. Knowing your AGI helps determine your eligibility for certain tax benefits and credits. The IRS website provides further details on how AGI is used in various tax calculations. Learn more on the IRS website.


Q&A

What is AGI in US taxes?

Adjusted Gross Income (AGI) is your gross income less certain deductions; it determines your tax liability and eligibility for deductions.

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