Adjusted Gross Income
What is Adjusted Gross Income?
Adjusted Gross Income (AGI) is your gross income after subtracting certain adjustments allowed by the IRS. These adjustments, also called 'above-the-line' deductions, reduce your taxable income without itemizing. AGI serves as a key figure in determining your tax liability, eligibility for various credits and deductions, and overall financial planning.
Why it matters
AGI is crucial because it determines your eligibility for many tax benefits and affects your tax bracket. A lower AGI can qualify you for more credits, reduce your Medicare premiums, and impact your ability to contribute to retirement accounts. It's also used by lenders to assess your financial health for loans and by government agencies to determine eligibility for certain benefits and subsidies.
How it works
AGI is calculated by starting with your gross income and subtracting eligible adjustments. Common adjustments include traditional IRA contributions, student loan interest payments, health savings account contributions, and self-employment taxes. The IRS provides a specific list of allowable adjustments in Publication 525. AGI cannot be negative; if adjustments exceed gross income, AGI is zero.
Examples
- A taxpayer with $80,000 gross income who contributes $6,000 to a traditional IRA and pays $2,500 in student loan interest has an AGI of $71,500 ($80,000 - $6,000 - $2,500).
- A self-employed consultant with $100,000 gross income who pays $12,000 in self-employment tax and contributes $8,000 to an SEP IRA has an AGI of $80,000.
- A married couple with combined gross income of $150,000 who contribute $12,000 to retirement accounts and have $3,000 in HSA contributions has an AGI of $135,000.
Common mistakes
- Claiming ineligible expenses as adjustments
- Forgetting to include all gross income before adjustments
- Miscalculating self-employment tax deductions
- Not keeping proper documentation for adjustments claimed
- Confusing adjustments with itemized deductions
FAQ
What's the difference between AGI and taxable income?
AGI is gross income minus adjustments. Taxable income is AGI minus either the standard deduction or itemized deductions, plus any qualified business income.
Can AGI be zero or negative?
AGI cannot be negative. If your adjustments equal or exceed your gross income, your AGI is zero.
How does AGI affect my tax bracket?
Your tax bracket is determined by your taxable income, not AGI. However, AGI affects which credits and deductions you're eligible for.
Are all deductions considered adjustments?
No, only 'above-the-line' deductions are adjustments that reduce AGI. Itemized deductions and personal exemptions reduce taxable income but not AGI.