What is adjusted gross income (AGI) and why is it important?
Adjusted Gross Income (AGI) is a measure of your taxable income and is used by the Internal Revenue Service (IRS) to determine how much you owe in taxes. It is calculated by subtracting certain adjustments, such as student loan interest payments, and deductions from the gross income to calculate the AGI.
Gross income is the total amount of money you earn in a year from all sources, including:
- Wages and salaries
- Self-employment income
- Interest and dividends
- Rental income
- Capital gains
- Social Security benefits
Adjustments to income are certain expenses that you can subtract from your gross income to arrive at your AGI. Some of these include:
- Student loan interest deduction
- Self-employment tax
- Moving expenses if you are a member of the armed forces
- Alimony payments
- Health savings account (HSA) contributions
Deductions are expenses that you can subtract from your AGI to arrive at your taxable income. These include:
- The standard deduction, for 2023 is $13,850 for single filers, $27,700 for joint filers, or $20,800 for heads of household.
- Itemized deductions, such as medical expenses, charitable contributions, and state and local taxes.
Your AGI will always be less than your total gross income because it includes all your income with any adjustments and deductions.
Calculating Adjusted Gross Income
AGI is important because it is used to determine your tax liability. The higher your AGI, the higher your tax liability will be.
AGI is also used to determine your eligibility for certain tax deductions and credits. For example, you may not be eligible for the Earned Income Tax Credit if your AGI is too high.
You can calculate your AGI using the following formula:
AGI = Gross income – Adjustments to income – deductions
There are multiple software applications that help you calculate your AGI. You can also consult a tax professional.
Understanding Adjusted Gross, Gross, and Taxable Income
- Gross income is the total amount of money you earn in a year from all sources.
- Adjusted gross income (AGI) is your gross income minus certain adjustments to income.
- Taxable income is your AGI minus deductions and credits.
AGI is an important concept in understanding your tax liability. By understanding how AGI is calculated, you can make informed decisions about your taxes and maximize your deductions and credits.