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Sunday, April 21, 2024

Unlocking AGI: How to calculate your adjusted gross income

Unlocking AGI: How to calculate your adjusted gross income


If you’ve ever filed taxes or applied for certain benefits, then you’ve probably come across the term adjusted gross income (AGI). This figure plays an important role in filing your income taxes but also applies when it comes to other income-based programs and benefits. Read on learn what adjusted gross income is and why it’s important to calculate your AGI.  

What is adjusted gross income (AGI)? 

Your adjusted gross income (AGI) is your gross income minus certain adjustments to income. It includes wages from your job, as well as dividends, capital gains, retirement distributions, and other income. It also takes into account adjustments that can include student loan interest, retirement contributions, and more. 

Your AGI helps determine your eligibility for certain income-based tax credits and deductions. Your AGI can also have an important role outside of your taxes. For example, it may be a criterion in qualifying for certain programs, as well as in determining your monthly student loan payment on an income-driven plan. 

How is adjusted gross income calculated? 

Your AGI is calculated by subtracting certain adjustments from your gross income on IRS Form 1040, Schedule 1. Your gross income can include: 

Wages from your jobs 

  • Dividends 
  • Capital gains 
  • Social Security 
  • Pension 
  • Business income 
  • Real estate income 
  • Farm income  
  • Unemployment income 

Adjustments that affect your AGI include: 

  • Educator expenses 
  • Certain business expenses 
  • HSA contributions 
  • Moving expenses for members of the Armed Forces 
  • Deductible part of self-employment tax 
  • Retirement contributions 
  • Self-employed health insurance deduction 
  • Alimony paid for divorce agreements on or before December 31, 2018 
  • Student loan interest 

How to calculate adjusted gross income 

When you’re ready to calculate your AGI, here are the steps you’ll need to follow: 

  • Step 1: Gather reported income: First, you’ll gather and add up all of your reported income sources, including your W-2 forms and 1099 forms. 
  • Step 2: Include taxable income from other sources: Next, add up any other income sources from the list above that count toward your gross income. 
  • Step 3: Subtract applicable adjustments: Once you’ve found your gross income, subtract any applicable adjustments from the list above. 
  • Step 4: Determine taxable income: The result of subtracting your adjustments from your gross income is your AGI. Once you’ve determined your AGI, you can either claim the standard deduction or itemize your deductions to find your taxable income. 
  • Step 5: Determine eligibility for credits and deductions: Your AGI will determine whether you qualify for certain income-based credits and deductions. Generally speaking, the lower your AGI, the more deductions and credits you’ll qualify for, which can further lower your tax bill. 

Where is AGI on a tax return? 

IRS Form 1040 is the form Americans use to file their income tax returns. In most cases, you’ll find your AGI on line 11. Lines 9 and 10 show your total income and adjustments, respectively. You’ll use these two lines to calculate your AGI. 

As you file your taxes, you may find that the term adjusted gross income appears throughout the various tax forms. Because it’s used for so many different things, it’s important to properly calculate it from the beginning. Calculating your AGI accurately will also ensure you claim all of the credits and deductions you’re eligible for. 

Importance of previous year's AGI 

It’s important that you save your previous year’s tax returns and that you be able to find your AGI. When you file your taxes electronically, the IRS form may require that you provide your previous year’s AGI as a verification tool. This helps the IRS to confirm your identity. 

Significance of adjusted gross income in state taxes 

Your AGI isn’t just relevant for your federal taxes. If your state has an income tax, your AGI could also be important. Many states use your federal AGI as the starting point for calculating your taxable income. Depending on where you live, your state may modify this number with additional deductions and adjustments specific to your state. 

What is your modified adjusted gross income (MAGI)? 

Your modified adjusted gross income (MAGI) is another important number for your taxes. It’s calculated by finding your AGI and adding back certain deductions. For many people, their MAGI is identical to their AGI. But for some, it's their AGI before accounting for any deductible student loan interest. 

MAGI has many important uses, including determining your eligibility for contributing to or deducting your contributions to certain retirement accounts, getting federal health insurance premium tax credits, certain education credits, and more. 

Adjusted gross income (AGI) vs. modified adjusted gross income (MAGI) 

AGI and MAGI Calculation 

Your AGI and MAGI are closely related. In fact, you must determine your AGI before you can calculate your AGI. Here are the steps for calculating your MAGI: 

  1. Add up your income from all sources. 

  1. Add up any adjustments to your income (see the list above). 

  1. Subtract your adjustments from your gross income to determine your AGI. 

  1. Add back in certain exclusions and deductions, including those for student loan interest or foreign income and housing. 

Uses of MAGI 

As we’ve mentioned, MAGI has several important uses. 

First, your MAGI determines whether you are able to deduct your traditional IRA contributions. It also determines whether you can contribute to a Roth IRA. 

Next, MAGI is an important figure when it comes to healthcare. It determines whether you qualify for any premium tax credits or other savings on health insurance plans through the federal insurance marketplace. It also determines eligibility for Medicaid and the Children’s Health Insurance Program (CHIP). 

Another important use for MAGI is determining whether you qualify for the Child Tax Credit, which offers $2,000 per child. 

Finally, MAGI is used when determining eligibility for certain education tax credits. For example, MAGI determines whether you qualify for the American Opportunity Tax Credit. 

It’s important to note that MAGI may be calculated differently depending on the benefit in question. You should address each individual benefit to determine what adjustments to use when calculating your MAGI. 

AGI and MAGI similarities 

As we’ve mentioned, for many people with simple tax situations, AGI and MAGI are likely to be identical. Even if your AGI and MAGI aren’t identical, the two numbers are likely to be quite similar. However, it’s important to calculate them separately — and accurately — to ensure you’ve claimed the right deductions and credits. 

Understanding Adjusted Gross Income (AGI), Gross Income, and Taxable Income 

There are many different terms used to reference your income: gross income, taxable income, adjusted gross income, modified adjusted gross income, etc. It’s easy to confuse these terms. We’ve already talked about the difference between AGI and MAGI. Now we’ll discuss gross income and taxable income to help clear up any additional confusion. 

Gross Income 

Your gross income is simply the total amount of income you earned that is subject to taxation. Gross income could include your salary or wages, interest, dividends, capital gains, business income, and more. 

While your gross income is used to calculate other figures, including your taxable income and AGI, it doesn’t directly affect your final tax liability. 

Taxable Income 

Your taxable income refers to the portion of your income that you’ll actually pay taxes on. It’s not the same as either your gross income or your AGI. In most cases, your taxable income will be your AGI minus either the standard deduction or any deductions you’ve itemized. 

Here’s how to calculate your taxable income: 

  1. Add up your income from all sources. 

  1. Add up any adjustments to your income (see the list above). 

  1. Subtract your adjustments from your gross income to determine your AGI. 

  1. Calculate your total deductions. 

  1. If you’re claiming the standard deduction, this number is already set and varies depending on your filing status. 

  1. If you’re itemizing deductions, you must add up any deductions you’re eligible for. 

  1. Decide whether you’re eligible for the qualified business income (QBI) deduction. If so, you can claim this in addition to the standard deduction or any itemized deductions. 

  1. Find our taxable income by subtracting all applicable deductions from your AGI. 

Once you’ve calculated your taxable income, you’ve found the actual dollar amount you’ll pay taxes on. This number can help you determine your tax bracket. But remember — your income isn’t all taxed at your highest tax bracket. Instead, each portion of income is taxed at the tax rate for the bracket it falls into. 

The added bonus of tax deductions is that not only do they reduce your taxable income — meaning the amount you actually pay taxes on — but they can help move you into a lower tax bracket, meaning you’ll pay a lower tax rate on the top portion of your income. 

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The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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