How to calculate adjusted gross income (AGI)

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When you file a tax return, you will always see a line to determine your Adjusted Gross Income, or AGI, before you get to your taxable income number. The AGI calculation depends on the tax return form you use; some forms allow you to make more income adjustments than others.

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Declaration of total income

Your AGI will never be more than the total income you report on the first few lines of your tax return, and in many cases, it will actually be less. Total income includes all of your annual income which is subject to income tax. This typically includes:

  • Your working wages declared on a W-2 form
  • Self-employment income, which is usually calculated on Annex C
  • Taxable interest and dividends
  • Taxable support payments you receive from a former spouse
  • Capital gains
  • Rental income
  • Any other payment you receive that is not specifically exempt from income tax

Deductions for AGI

Throughout your tax return form, there are many opportunities to take deductions, some of which reduce your total income to determine the AGI, and others that are taken in later parts of the return.

The deductions you make to calculate the AGI are called “income adjustments”. These are specific expenses that the IRS allows you to use to effectively reduce your total income to arrive at your AGI. Sometimes you will hear these “above the line” deductions.

Tax laws change every year, but here are some examples of income adjustments:

Deducting your allowable adjustments from your total income gives your AGI.

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Importance of AGI

The amount of your AGI directly influences your eligibility to claim many of the deductions and credits available on your tax return.

If you detail the deductions and report medical expenses, for example, you need to reduce the total expense by 7.5% of your AGI for 2020.

  • So if you declare $ 10,000 in medical fees and an AGI of $ 100,000; you must reduce your deduction by $ 7,500.
  • But, if your AGI is $ 50,000, the reduction is only $ 3,750.

In general, the lower your AGI, the higher the deductions and credits you will be entitled to.

Modified Adjusted Gross Income (MAGI)

Throughout your return, you will notice that the IRS also uses modified adjusted gross income, or MAGI. Your MAGI is your AGI increased or decreased by certain amounts which are specific to specific deductions.

For example, you need to calculate your MAGI if you want to deduct a portion of your student loan interest. For this deduction, your MAGI will be your AGI plus certain exclusions and deductions that you have claimed for residence outside the United States, such as the exclusion of income earned abroad.

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