Adjusted gross income (AGI) and how to calculate it

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Doing your own taxes is certainly no fun, but it’s definitely doable as long as you have all the information you need at hand. By using this, you will not only be able to enter this information, but also use it to perform certain calculations. And online filing has made the process easier than ever.

You will need to report several different forms of income on your tax return. One of the most important to know is your Adjusted Gross Income (AGI). Your AGI can determine the number of factors for the remainder of your tax return, which could affect your taxable income in the process.

Understanding the AGI is one of the first things you’ll need to understand when filing your taxes, and with the filing deadline quickly approaching, it’s safer than ever. So what is adjusted gross income, how can it affect the rest of your taxes, and how do you calculate it?

What is adjusted gross income?

Adjusted gross income is your gross income, that is to say all the income you have received during the last year (salaries declared in your W2, eligible dividends, taxable interest, alimony, real estate profits, unemployment, social security payments, etc.), but adjusted to reflect certain expenses incurred throughout the year. Depending on your income and expenses, this can reduce your taxable income quite significantly.

The calculation of the AGI comes very early when you complete your Form 1040, which means that adjustments to your taxable income for the AGI are made before determining other tax deductions, tax credits, and tax exemptions.

Adjusted gross income is also something of a midpoint between your total income and your taxable income. By subtracting certain expenses and deductions from total income, you get your AGI; by subtracting other deductions (such as a deduction for business income), you will get your taxable income.

How to calculate adjusted gross income

The determination of your adjusted gross income will be done on the aforementioned Form 1040. The 1040 is the centerpiece of your tax return, providing the IRS with your total income, adjustable gross income, tax deductions, tax credits, and if you are eligible, a tax refund.

Very recently, the 1040 underwent an incredibly simplifying makeover. The form itself is now two relatively short pages long to provide the necessary personal and income information. Anything that needs to be added that does not have a line in the form can be placed in 1 of 6 “schedules” or additional 1040 forms offered by the IRS. For AGI, you will need both Form 1040 and Schedule 1.

Have all of your income information handy when you start filling out Form 1040. Relevant income information is filled out on the second page, as lines 1-5 of the form involve entering income. Line 1 is for your salary (with the corresponding W2 forms attached). From there, if you have any of the following, you’ll need to put in the income you’ve earned from interest, dividends, IRAs, pensions, annuities, and Social Security benefits.

After that you should look at Schedule 1. The first half of the form is for “additional income”, income from means other than those listed on the original form. This may include:

  • Support payments received
  • Taxable refunds
  • Business income
  • Capital gains
  • Unemployment
  • Rental income

Among the other options available on appendix 1, as well as a line “Other income” for everything that applies but is not specifically mentioned. Some forms of income will justify another form attached as proof.

With this, you can add the first five lines of Form 1040 and the other forms of income from Schedule 1, and enter them on line 6 of 1040 as total income.

Line 7 is adjusted gross income. Go back to Schedule 1 and you will notice that the second half of the page is “Income Adjustments”. Here, lines 23 through 35 are reserved for specific deductions that the IRS considers “above the line” that can be removed from your total income. This includes:

  • Deduction of interest on student loans
  • Health savings account deduction (CSH)
  • Alimony paid
  • Educator’s expenses
  • Self-employed workers’ health insurance deduction
  • IRA deduction

When you have entered your allowable income adjustments, add them up and enter the amount on line 36 of Schedule 1. Back on the original Form 1040, line 7 is where you subtract these income adjustments from. your total income (line 6 minus line 36), to get the number corresponding to your adjusted gross income.

How your AGI varies from your total income will depend on the adjustments you need to make. Some people will have a lot of adjustments to make; some may not have any at all and end up with an AGI identical to their total income.

Effects of adjusted gross income

If you have enough adjustments to your income, you could potentially end up with a lower AGI than you anticipated. Depending on the tax deductions and credits you want to claim, this could work in your favor. For example, if you have qualifying medical expenses that you hope to deduct from last year, they must be more than 7.5% of your adjusted gross income (as of January 1, 2019, it has become 10%).

Let’s say you have $ 6,000 in eligible medical expenses and your AGI is $ 55,000. 7.5% of $ 55,000 equals $ 4,125, which means that any expenses that exceed this number can be deducted. In this case, that means your deduction is 6,000 to 4,125, which comes to $ 1,875. But if your AGI was $ 40,000, that would be any expense over $ 3,000, which means your deduction would be $ 3,000.

Deductions for medical expenses are far from the only thing AGI has an impact on. Many tax credits depend on your AGI, as well as the specific amount for which you are eligible. Often times, the amount you can claim through tax credits starts to decrease once you reach a certain AGI, and if you go over a higher number, you cease to be eligible for that credit.

What is modified adjusted gross income?

Eligibility for other tax deductions is not based on adjusted gross income, but on modified adjusted gross income (MAGI). For example, whether or not you can get a deduction from your IRA is determined by your MAGI. What is the difference between AGI and MAGI?

In fact, calculating AGI already brings you a lot closer to calculating MAGI since you have already gone from gross income to adjusted gross income. Modified adjusted gross income is adjusted gross income, but with some of these deductions rolled back into the figure. This can mean adding interest on student loans, tuition deductions, IRA contributions, income earned overseas, or passive income or loss.

Changes from AGI to MAGI can have a huge impact on your taxes and the credits to which you are entitled. For a lot of people, however, that doesn’t end up being a huge difference.


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