Adjusted gross income, or AGI, is extremely important for filing your annual income taxes. More specifically, it appears on your Form 1040 and helps determine which deductions and credits you are eligible for. Based on the amount of your AGI, you can then figure out how much you’ll owe in income taxes. For tax year 2022, you can find your AGI on page 1, line 11 of the IRS Form 1040.
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Adjusted gross income (AGI) is a variation of your gross income that accounts for certain deductions that usually make it lower than your gross income. By contrast, gross income is the total amount of money you earn in a year before income taxes or other deductions are taken out. Because of this distinction, AGI is typically the foundation for calculating how much you’ll owe in taxes.
Your AGI heavily affects what deductions and credits you’re eligible for in a tax year. For example, if you have a low AGI, you’ll likely be able to claim more in deductions and credits than someone with a higher AGI.
To determine your adjusted gross income, start with your gross income. This includes wages or salary from a job, bank account interest, stock dividends and rental property income. If you reported self-employment business income on Schedule C, you would include that in your gross income as well. Bonuses, tips, alimony and even gambling winnings are also part of gross income. You generally do not include life insurance payments, child support, loan proceeds, inheritances or gifts in your AGI, though.
From your gross income, you then subtract specific amounts by making “adjustments” called “above the line” deductions. This is available to taxpayers even if they are taking the standard deduction.
One example of a payment you may be able to subtract from your gross income is a contribution to a qualified retirement account, such as an IRA. Other permissible subtractions may include interest on student loans, alimony payments, contributions to health savings accounts (HSAs) and certain kinds of moving expenses. In turn, AGI is the result of taking all of these adjustments from your gross income.
Online tax preparation services and software programs both calculate AGI for you and automatically enter it into the correct line. Regardless of these convenient features, make sure you enter these amounts correctly when transferring the information from the forms your employer gives you to Form 1040.
Your adjusted gross income affects the extent to which you can use deductions and credits to reduce your taxable income. For instance, consider the effect of AGI on medical and dental expenses for taxpayers who itemize.
Those who itemize can deduct only the amount of qualified medical and dental expenses that are higher than a certain percentage of their adjusted gross income. For tax year 2023, which you file early in 2024, this limit is once again 7.5% of your AGI. This means that if your medical and dental expenses don’t exceed 7.5% of your AGI, you likely won’t be able to deduct them at all.
AGI-related limits also apply to deductions for tuition and charitable contributions. You can generally deduct qualified charitable contributions you made only until the deduction amount reaches 50% of your AGI. Therefore, your AGI has a significant effect on which deductions and credits you can take, as well as how much they’re worth.
Your adjusted gross income is especially important if you live in a state that collects state income taxes. Many states use the AGI from your federal return as the starting point for state income tax calculations.
Your AGI is not the income figure on which the IRS will tax you. Your final income number, or “taxable income,” comes from subtracting even more deductions from your AGI.
For the 2023 tax year, the vast majority of taxpayers will likely use the standard deduction rather than itemized deductions. Under current laws, the standard deduction for the 2023 tax year (filed in 2024) is $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of household. For tax year 2024 (what you file in early 2025) the standard deduction is $14,600 for single filers, $29,200 for joint filers and $21,900 for heads of household.
Modified adjusted gross income, or MAGI, is another term related to taxable income and adjusted gross income. MAGI comes into play when you’re trying to figure out whether you qualify for certain deductions. For instance, if your MAGI is above certain income limits and you have a workplace retirement plan, you may not be able to take the full deduction for contributing to an IRA.
To calculate your MAGI, you have to add certain deductions, such as student loan interest, back to your adjusted gross income. If you didn’t claim any of these deductions, your AGI and MAGI should be the same.
Calculating your AGI is a crucial step towards finding out how much of your income is taxable. It can be relatively simple if you have a good idea of what parts of your income constitute the figure. With changing tax laws and forms, however, some of these situations can get tricky. It’s smart to work with an accountant or use a reliable tax software program to help you out. Also, many financial advisors offer tax planning and tax preparation services.
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Mark HenricksMark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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