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Video: Adjusted Gross Income (AGI) Explained

Updated for Tax Year 2015


It is important to understand how your adjusted gross income (AGI) affects your taxable income. Your AGI determines whether you can claim certain deductions and credits. To have AGI explained further, check out this video.

Hello, I’m Lisa Skelly from TurboTax with some interesting information about the importance of your adjusted gross income.

You are probably more interested in what your taxable income is than your adjusted gross income, or AGI as it’s sometimes called. But if you understand what your AGI is and how it affects your taxable income, you may find yourself paying a little more attention to it.

The AGI calculation is rather simple. By subtracting certain deductions that the IRS refers to as “adjustments to income” from your total income, you arrive at your AGI. Adjustments to income are specific types of deductions listed on the first page of your 1040. If you use the 1040A instead, the IRS makes only a small number of them available—and none at all if you file on the 1040EZ.

The IRS uses your AGI as a threshold amount to determine whether you can claim certain deductions and credits, and the amounts you’re eligible for. And for some credits and deductions, the IRS uses a variation of your AGI known as modified adjusted gross income or MAGI. For example, the student loan interest deduction uses two MAGI thresholds. If your MAGI exceeds the first threshold amount, you are still eligible for a deduction, but it will be smaller than the maximum. However, if you report an MAGI that is at least equal to the second threshold, the student loan interest deduction is no longer available to you at all.

The MAGI calculation changes depending on the deduction, but it’s always larger than your AGI. For example, suppose you take a $2,000 student loan interest deduction and your AGI is $50,000. Calculating your MAGI requires you to increase your AGI by $2,000—to $52,000. Other items reported on your return may also affect your MAGI, but the IRS will note this in the instructions to your return. Your AGI also has a direct impact on the amount of itemized deductions you can report. Some of the expenses you claim on Schedule A, such as medical expenses, must be reduced by a percentage of your AGI. And lastly, the AGI you report on your federal return can affect your state tax return as well. This is because many states use your federal AGI as the starting point for calculating your state taxable income and as a threshold for assessing your eligibility to claim deductions.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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