What is Adjusted Gross Income (AGI)?
Adjusted gross income (AGI) can directly impact the deductions and credits you are eligible for, which can wind up reducing the amount of taxable income you report on your tax return.
Key Takeaways
- Your adjusted gross income (AGI) is equal to the total income you report minus specific deductions, or adjustments, that you’re eligible to take.
- Income adjustments can include contributions to eligible retirement accounts, student loan interest you paid, alimony payments to a former spouse (for agreements prior to 2019), self-employed health insurance premiums, and half of the self-employment taxes you pay.
- If your state has an income tax, your AGI can affect those taxes, too, since many states use your federal AGI as the starting point for calculating your state taxable income.
AGI Overview
When preparing your tax return, you probably pay more attention to your taxable income than your adjusted gross income (AGI). However, your AGI is also worthy of your attention, since it can directly impact the deductions and credits you’re eligible for—which can wind up reducing the amount of taxable income you report on the return.
AGI calculation
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.
- Your AGI is calculated before you take the standard or itemized deductions —which you report in later sections of your tax return.
Adjustments to income
Adjustments to income are specific deductions that directly reduce your total income to arrive at your AGI. The types of adjustments that you can deduct are subject to change each year, but a number of them consistently show up on tax returns year after year. Some of these adjustments include:
- half of the self-employment taxes you pay
- self-employed health insurance premiums
- alimony payments made to a former spouse (for agreements prior to 2019)
- contributions to certain retirement accounts (such as a traditional IRA)
- student loan interest paid
TurboTax Tip:
Your AGI can directly impact the deductions and credits you’re eligible to take, potentially reducing your taxable income and the amount of taxes you owe. For example, your AGI has to be below certain levels to claim the Lifetime Learning Credit.
Impact on deductions and credits
Many of the deductions and credits that taxpayers commonly take advantage of each year are subject to AGI limitations. If you itemize deductions, for example, you must reduce your medical and dental expenses by 7.5% of your AGI. This means that you can only deduct the amount that exceeds 7.5% of your AGI. Therefore, the lower your AGI is, the more of your medical and dental expenses you can deduct.
Even some of your adjustments to income are subject to AGI limitations despite the fact that those deductions are necessary to calculate your AGI. If you’re eligible to deduct some of your tuition payments, your modified adjusted gross income (MAGI) determines whether you qualify.
Other AGI implications
If you live in a state that requires you to file annual income tax returns, your AGI can also impact your state taxable income. This is because many states use your federal AGI as the starting point for calculating your state taxable income. And if you claim a tax credit, such as the lifetime learning credit, for your school expenses, the IRS requires that your MAGI be below certain thresholds in order to claim the credit.
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