Everything You Need to Know About Adjusted Gross Income
In this video, you’ll learn all about adjusted gross income. Adjusted gross income, or AGI, is the figure the IRS uses to determine how much income tax you owe for the year. Your annual income can include job income, such as what’s reported on your W2 or 1099, and other types, like dividends, rental income, or the sale of a property. Watch and learn as we explain common adjustments on AGI including student loan interest deductions and alimony payments.
Reviewed by Lea D. UraduFact checked by Yarilet PerezReviewed by Lea D. UraduFact checked by Yarilet Perez
Calculating your adjusted gross income (AGI) is one of the first steps in determining your taxable income for the year. Once you have determined what your adjusted gross income is, you can determine your tax liability for the year.
Below are some helpful tips for how to calculate your adjusted gross income (AGI) for tax purposes.
Before you calculate your AGI, you may want to determine whether you need to file a tax return for the year. The Internal Revenue Service (IRS) provides an interactive tax assistant that can help you do that.
But even if you are not required to file a tax return, the IRS recommends that you do so. This is because you may be eligible for a tax return if you paid income tax, or you may be eligible for certain credits.
Key Takeaways
- The first step in computing your AGI is to determine your total gross income for the year.
- Your total gross income includes your salary in addition to any earnings from self-employment ventures and any other income reported on 1099 forms, like investment dividends and retirement income.
- To arrive at your final AGI, you are allowed to subtract certain amounts from your total income.
- Teachers, for example, can deduct unreimbursed classroom expenses, and self-employed people can deduct insurance premiums.
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How to Calculate Your Adjusted Gross Income (AGI)
There are just two steps to calculating your AGI:
- Gather all your income statements for taxable income—salary, self-employment, income reported on 1099 forms, and more—and add them up to arrive at your total or gross income.
- Subtract allowable deductions and expenses from the sum.
Below, we provide additional details on these steps.
Gather Your Income Statements
The first step in computing your AGI is to determine your income for the year. Income can be in the form of money, property, or services you receive in the tax year.
Income includes your traditional salary and wages, which are reported on Form W-2, any earnings from self-employment ventures, and any other income reported on 1099 forms, like investment dividends and retirement income. Proceeds from broker and barter exchange transactions reported on Form 1099-B, proceeds from real estate transactions reported on Form 1099-S, any taxable interest reported on Form 1099-INT, and any investment dividends reported on Form 1099-DIV are all considered part of your taxable income.
In addition, you will also need to include these sources of taxable income:
- Business income
- Farm income
- Union strike benefits
- Taxable refunds, credits, or offsets of state and local income taxes
- Long-term disability benefits received prior to minimum retirement age
- Jury duty fees
- Security deposits and rental property income
- Awards, prizes, gambling, lottery, and contest winnings
- Back pay from labor discrimination lawsuits
- Spousal support
- Unemployment benefits
- Capital gains
- Severance pay
- Earnings from rental real estate, royalties, partnerships, S corporations, trusts, and license payments
You can calculate your total income by adding all of these amounts together.
Income That Is Not Taxed
Some types of income are not taxed. The following sources of income do not count toward your AGI:
- Workers’ compensation benefits
- Child support benefits
- Life insurance proceeds (unless the policy was turned over to you for a price)
- Disability payments
- Capital gains on the sale of your primary home
- Money received as a gift or other inherited assets
- Canceled debts intended as a gift to you
- Scholarships or fellowship grants
- Foster care payments
- Money rolled over from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)
Subtract Deductions and Expenses
To arrive at your final AGI, you are allowed to subtract certain amounts from your total income. Here are some of the expenses you can deduct:
- Deduction for half of the self-employment tax (the employer-equivalent share)
- Classroom expenses for teachers and educations (up to $300 or $600 if married filing jointly and both spouses are eligible educators)
- Self-employed health insurance premiums (this also applies if the policy covers your spouse and your dependents)
- Contributions to certain retirement accounts
- Student loan interest paid
- Contributions to health savings accounts (HSAs)
- Moving expenses for members of the armed services
- Penalties on early withdrawals of savings
- Certain business expenses of reservists, performing artists, and fee-basis government officials
Be careful when figuring the amounts for these categories, as special requirements must be met for each.
Modified AGI vs. AGI
A common mistake made by inexperienced tax preparers is to use AGI in cases where the modified AGI should be used. Your MAGI is your adjust gross income with some deductions added back. While your AGI is used to determine the amount of income tax you owe and certain credits for which you are eligible, your modified AGI is used to determine eligibility for other items such as deducting contributions from a traditional IRA and eligibility to contribute to a Roth IRA.
Work With a Professional
Unless you have the time and aptitude to follow the IRS instructions and conduct any necessary research, it might be more practical to use the services of an experienced tax professional. While hiring a tax professional may cost you more, it may be well worth it considering the time saved and frustration prevented from trying to figure out the rules on your own. The cost may also be offset by tax credits or other savings a tax pro may find for you.
What Is My Adjusted Gross Income (AGI)?
According to the IRS, adjusted gross income, or AGI, is your total income minus deductions—or “adjustments to income,” as the IRS calls them—to your income that you are eligible to take. Gross income includes wages, dividends, capital gains, retirement income, and rents. Deductions might include self-employed health insurance premiums, student loan interest you’ve paid, and contributions to certain retirement accounts.
How Do I Determine My Adjust Gross Income (AGI)?
If you add up your total income and then subtract the deductions you are eligible for, you will arrive at your adjusted gross income.
Can I Get My Adjusted Gross Income (AGI) From My W-2?
No, your AGI is not to be found on your W-2 form. Your AGI includes amounts from your W-2, but there are additional components that make up an AGI.
The Bottom Line
Figuring out your AGI may seem like a simple process at first glance. However, even if you use the IRS instructions for completing your tax return, you run the risk of making costly mistakes, especially if you are inexperienced. Even if you complete the process on your own, consider having a tax professional review your results to ensure their accuracy.
Read the original article on Investopedia.