What is adjusted gross income (AGI)?
Your gross income is the total amount of money you make before taxes and other deductions are subtracted.
It’s not just your salary or wages included in this number: everything you make, whether through dividends, capital gains, business income, retirement distribution or other sources of income counts toward the final figure.
To find your adjusted gross income, you take your total gross income and subtract the amount of certain payments you make throughout the year. These can include:
- Losses from a property sale.
- Retirement plan contributions, including IRAs.
- Up to 50% of self-employment tax.
- Health-care savings account deductions.
- Moving expenses for active-duty military personnel.
- School tuition and fees.
Your AGI will never be more than your gross income. In fact, most people will find it’s a lower figure. This adjusted number reflects a more accurate representation of what you earn in a year, which the government can fairly tax.
Why is AGI important?
The Internal Revenue Service (IRS) uses this figure to calculate how much you owe in income taxes for the year.
Your AGI can impact how much you’re allowed to deduct in a given year as well as your eligibility for some types of retirement plan contributions.
In addition to your federal taxes, many states also use the IRS’s AGI figures to calculate how much you owe in state income taxes. And in addition to that, several will also add their own state-specific deductions and credits.
You can find your AGI on your IRS Form 1040. If you’re gathering your documents for 2020, you can refer back to line 8b on your 2019 return to get an idea of what your AGI should be for last year’s reporting.
How to calculate adjusted gross income
To calculate your AGI, you’ll want to start by tallying all your reported income for the year you’re filing for. This includes all your taxable income, profits from the sale of property, pension checks, unemployment support checks and anything else you did that made you money that year.
Did you sell a car? Add it. Did you do some tutoring on the side? That counts too.
However, not included in your taxable income for 2020 are the two pandemic stimulus checks.
Once you have your earnings total, go ahead and start subtracting your above-the-line deductions and payments. The number you end up with is your AGI.
Remember, it will never be more than your total gross income. If it is, it’s time to run the numbers again.
With your AGI, you can either apply for standard federal tax deductions or calculate expenses for itemized deductions (if you’re eligible).
With the changes made in the Tax Cuts and Jobs Act in 2017, the standard deduction limit for individuals was raised to 12,400, making it unnecessary for many taxpayers to go to the trouble of itemizing deductions.
If you’re unsure, you may want to loop in a tax expert to help you figure out which option will save you the most money.
It’s not as difficult as it may seem. Let’s run through a scenario together. Let’s say you’re a single person with an $80,000 total income with the below qualifying above-the-line deductions:
- $4,500 in health-care savings account deductions.
- $500 in student loan interest.
- $5,000 in IRA contributions.
Your adjustments total $10,000. When you subtract that from your gross income of $80,000, you’ll find your AGI is $70,000.
So that means that $10,000 in adjustments won’t be included in what the federal government will tax you for that year.
What about modified AGI (MAGI)?
There are some tax calculations or government programs that will require your modified adjusted gross income (MAGI).
You can find this number through taking your AGI and adding back certain figures, like how much you paid in student loan interest or for tuition and school fees.
Your MAGI is then used to help calculate how much you can contribute to your Roth IRA or whether you qualify for certain tax credits and income-based Medicaid or subsidized health insurance plans on the Health Insurance Marketplace.
If you have a fairly uncomplicated financial situation, it’s likely your AGI and MAGI will be either fairly close or the same number.
IRS Free File
Calculating your AGI can also be helpful in finding out whether you qualify for certain perks, like the IRS Free File.
Free File is available to households that have a $72,000 AGI or less. For couples that are filing jointly, the limitation will count for both of you combined.
With Free File, you’ll be able to file your taxes for free on an IRS partner site. You’ll have to know how to file your taxes, but there is guided preparation and an online service that does all the math for you.
How to proceed
Your AGI will likely fluctuate year to year. So while it’s helpful to use the number provided on your previous year’s tax return, if you know you earned more income or had more deductions this year, you’ll want to recalculate every time you file.
However, the number on your tax records serves another important purpose. The IRS will use it to verify your identity.
So even if your income or deductions have changed over the course of the year, you’ll still need to have your previous AGI handy when filing your taxes.