When it comes to income, there are several important numbers you need to know. In addition to your total salary, one of the most useful income figures is your Adjusted Gross Income, or AGI. This is basically your total earned income, with some specific adjustments subtracted. Here’s what Adjusted Gross Income is, how you can determine yours, and what it’s used for.
Salary and gross income
Your salary includes the total amount of money you receive from your job before taxes or other payroll deductions are taken. If you don’t know your salary, it should be fairly easy to calculate. Just look at one of your recent pay stubs, locate the pre-tax pay (excluding overtime or bonuses), and multiply by the number of pay periods in a year.
For example, if you get paid every two weeks (26 times per year) and your pre-tax income on one of your paychecks is $ 2,000, your salary is $ 52,000.
Go further, gross revenue is a much more useful number to know. It includes your salary, as well as any other form of income you may have. This may include, but is not necessarily limited to:
- Interest income
- Rental income
- Royalty fee
- Capital gains
- Self-employment income
When determining your taxable income, the first thing the IRS does is subtract certain items, called income adjustments. These may change over time, but currently include:
- Qualifying retirement contributions, such as a 401 (k) or traditional IRA
- Teachers’ class fees
- Moving expenses, if they are related to starting a new job
- Alimony paid
- Tuition and fees
- Bad debts (irrecoverable) owed to you
- Student loan interest
After these items are subtracted from your gross income, the result is your Adjusted Gross Income, or AGI.
Do not confuse income adjustments with tax deductions. Tax deductions, also known as âbelow the lineâ deductions, can only be taken if the taxpayer chooses to itemize; otherwise, he or she takes the standard deduction. Income adjustments can be made whether or not the taxpayer details.
Adjusted gross income – why it matters
Your adjusted gross income is important for several reasons. First of all, it’s the number that determines if you qualify for certain tax breaks. For example, the American Opportunity Credit, the mortgage insurance deduction, and the ability to contribute directly to a Roth IRA all depend on your AGI.
AGI is also used by many lenders when applying for a loan to determine your repayment capacity. Some government assistance programs also use the AGI to determine whether or not you qualify.
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