How To Calculate AGI (Adjusted Gross Income)

Understanding what adjusted gross income is and calculating it accurately is essential for working professionals across all industries and professions. No matter your title or job, solidifying your grasp and comprehension of adjusted gross income can help you avoid headaches when tax season rolls around and even saves you serious cash.

Ask any accountant or tax prep expert, and they’ll tell you that accurately calculating your adjusted gross income is imperative when filing your taxes and reporting your taxable income to the IRS.

Determining your adjusted gross income is typically one of the first steps individuals must take to determine their annual taxable earnings and the tax bracket they qualify for.

Precisely calculating adjusted gross income on your tax form and including all eligible and qualifying tax deductions can help reduce the amount of federal, local, or state tax you’re required to pay yearly. Your adjusted gross income is one of the most important calculations on your tax return for tax purposes.

What Is Adjusted Gross Income?

Adjusted gross income refers to your total annual income, minus any deductible expenses that can be subtracted based on your filing status and various other allowable thresholds.

A person arrives at their adjusted gross income by calculating their total earnings for a given year — including salary, bonuses, self-employment profits, and investment income — then subtracting certain allowable amounts from their total income, like unreimbursed classroom expenses for teachers and school tuition.

Other expenses include student loan interest, health savings account deductions, self-employed health insurance deductions, and moving expenses for the armed forces.

IRS forms often require taxpayers to claim their yearly adjusted gross income on their federal tax return to determine the total amount of taxes owed and any tax breaks or credits an individual, couple, or family may qualify for. When filing your yearly income taxes, adjusted gross income is most often reported on line 8b of IRS form 1040.

Using the tips outlined in this article, you’ll be able to accurately estimate and precisely calculate your annual adjusted gross income, taking into account standard deductions for United States taxpayers, and easily file taxes and enjoy numerous tax benefits.

Adjusted Gross Income vs. Modified Adjusted Gross Income

Adjusted gross income is often confused with modified adjusted gross income, which can cause some discrepancies when it comes time for tax filing.

While adjusted gross income refers to an employee’s total annual income minus all qualifying deductions, modified adjusted gross income, according to the IRS, refers to a person’s adjusted gross income plus certain deductions previously subtracted from their total taxable income.

Typical “add-backs” that are included in a person’s modified adjusted gross income but not in their adjusted gross income include student loan interest, portions of self-employment tax, tuition expenses, and fees, passive loss or passive income, IRA contributions, non-taxable social security payments, foreign earned income, and rental losses.

Although the two numbers can often be close in value to each other, both adjusted gross income and modified adjusted gross income affect a taxpayer’s eligibility for numerous tax benefits, so accurately reporting each amount on a tax return is essential.

Generally speaking, adjusted gross income determines how much income tax you owe and what tax credits you’re eligible for, such as the child tax credit, the child and dependent care credit, credits for the elderly or permanently disabled, the American opportunity and lifetime learning tax credits, and the earned income tax credit.

Modified adjusted gross income, on the other hand, is used to determine whether or not you qualify for certain tax deductions and is most often used to determine your eligibility to contribute to a Roth IRA and establish whether or not you can deduct your individual retirement plan investments from your taxes.

How To Calculate Adjusted Gross Income For Tax Purposes

While it may sound intimidating at first, calculating your adjusted gross income is usually a pretty simple process, much like calculating the inflation rate.

The first step in calculating your adjusted gross income is determining your total earnings for the year according to your income statements. When working out your total annual income, it’s important to remember that, for tax purposes, income can be in the form of money, property, or even services.

Typically, the salary reported on your W-2 form, any income reported on 1099 forms, and profits from self-employment ventures are all considered part of your taxable income, and therefore must be accounted for when calculating your adjusted gross income.

Additionally, the IRS has also established that the following items should be included when determining your gross income:

• Earnings from rental real estate, royalties, partnerships, S corporations, trusts, and license payments

• Severance pay

• Capital gains

• Unemployment benefits

• Spousal support

• Back pay from labor discrimination lawsuits

• Awards, prizes, gambling, lottery, and contest winnings

• Security deposits and rental property income

• Jury duty fees

• Long-term disability benefits received before minimum retirement age

• Taxable refunds, credits, or offsets of state and local income taxes

• Union strike benefits

• Farm income

• Business income

Although most of your yearly earnings must be included when calculating your total, or gross, income, some types of income can be excluded from this number, as they are not taxed. The following income is not taxed and, therefore, does not need to be included in your adjusted gross income calculations:

• Money rolled over from one retirement account to another, executed using a trustee-to-trustee transfer

• Foster care payments

• Scholarships or fellowship grants

• Canceled debts intended as a gift

• Certain inherited assets of money received as a gift

• Capital gains on the sale of your primary residence

• Disability payments

• Life insurance proceeds

• Child support benefits

• Workers’ compensation benefits

Once you have added up all of your qualified earnings for the year and determined your total income, the next step involves determining what tax deductions you are eligible for and subtracting certain monetary amounts from your total income to compute your adjusted gross income.

Depending on your salary, your job, your tax filing status, and other life and financial circumstances, there are various adjustments that you may qualify for, which allow you to deduct certain expenses from your total income, thus lowering your adjusted gross income and reducing your tax bill.

Generally speaking, individuals with lower adjusted gross incomes are typically eligible for more deductions and tax credits.

Itemizing your deductions or using the IRS’ standard deduction form will allow you to compute your final adjusted gross income for the tax year. According to the IRS, some of the most common adjustments professionals consider when determining their itemized deductions are as follows:

• Medical and dental expenses

• Deductible taxes

• Home mortgage points

• Interest expense

• Charitable contributions

• Tuition and fees

• Business use of home

• Business use of car

• Business travel expenses

• Work-related education expenses

• Casualty, disaster, and theft losses

When reviewing your eligibility for many of these tax credits and tax deductions, it may be a good idea to work with a tax professional, as tax laws can often shift.

After cost accounting and subtracting any applicable deductions from your total gross income, the resulting figure represents your adjusted gross income for the tax year.

Understanding Adjusted Gross Income Deductions

Understanding what deductions you are eligible for and what adjustments you are entitled to can be tricky since everyone, depending on life and financial circumstances, is subject to a specific different tax bracket and can qualify for additional refunds, breaks, and tax credits.

Depending on your personal and professional situation, you should decide to adjust your taxable income using either a standard deduction or an itemized deduction. Both deductions allow taxpayers to reduce their taxable income and are commonly used by professionals of every age, in every industry, and pay grade.

A standard deduction is a predetermined amount established by the IRS based on a taxpayer’s filing status, age, and whether or not they are disabled or claimed as a dependent on someone else’s tax return.

If the value of expenses that you can deduct from your taxable income exceeds the standard deduction you qualify for, an itemized deduction may be a better option for you.

An itemized deduction allows taxpayers to specifically list all eligible tax adjustments, including mortgage interest, charitable gifts, and unreimbursed medical expenses, on schedule A of form 1040 when filing their taxes. Frequently, itemized deductions allow individuals to pay less tax than they otherwise would have if they used a standard deduction.

For itemized deductions, in particular, it’s important to save all receipts and proof of expenses — like bank statements, insurance bills, medical bills, and tax receipts from qualified charitable organizations — if you are audited.

Both standard and itemized deductions can significantly reduce your taxable income and, depending on your tax bracket, can save you substantial amounts.

Typically, taxpayers opt to adjust their gross income and compute their adjusted gross income, using the deduction option that benefits them most or allows them to enjoy the most savings. Reviewing your expenses with an accountant or tax professional can help you decide which deduction is best for your specific circumstances.

Final Thoughts

The first step in correctly completing and filing your tax returns and paying only the taxes required of you based on your annual earned income accurately evaluates your qualifying tax deductions and determines your adjusted gross income.

By precisely and proficiently calculating your adjusted gross income, you can save a significant amount of money, depending on your total taxable income and the tax bracket you qualify for, and avoid any discrepancies when it comes time to file your annual state, federal, and local taxes.

Author

Elsie Boskamp

Elsie is an experienced writer, reporter, and content creator. As a leader in her field, Elsie is best known for her work as a Reporter for The Southampton Press, but she can also be credited with contributions to Long Island Pulse Magazine and Hamptons Online. She holds a Bachelor of Arts degree in journalism from Stony Brook University and currently resides in Franklin, Tennessee.