What Is Adjusted Gross Income?

How adjusted gross income works

Your adjusted gross income is your total (gross) income minus any adjustments to income, according to the Internal Revenue Service (IRS).

Your AGI is the income you report minus any deductions recognized by the IRS.

You’ll need to calculate your AGI on your federal tax return before you can claim standard or itemized deductions. Also, note that some states require you to report your AGI on your state tax return.

How to calculate your AGI

AGI is a calculation, and it’s not listed on your W-2. Fortunately, you can determine your AGI yourself using the following formula:

For taxpayers who are married and filing together, AGI is the gross income minus adjustments for both spouses.

1. Add up income sources

Determine your gross income by adding up all of your income sources for the year. For example, your gross income might include:

• Business income
• Unemployment compensation
• Alimony
• Rental income or royalties
• Stock options

The IRS publishes a list of recognized income sources in Part I of Schedule 1, the Additional Income and Adjustments to Income form, which must be attached to Form 1040, the U.S. Individual Income Tax Return form.

2. Add up adjustments to income

Add together any IRS-recognized adjustments to income. Some of the adjustments, or expenses, the IRS allows you to claim to directly reduce your total taxable income include:

• Student loan interest
• Educator expenses
• Health savings account (HSA) deductions
• Alimony paid

Adjustments to income are listed in Part II of Schedule 1.

3. Subtract adjustments

Next, subtract your total adjustments from your gross income to get your AGI.

Why is your AGI important?

Your AGI impacts several aspects of your finances, including:

Taxable income

The IRS uses AGI to help determine how much you’ll pay in federal income taxes for the year. If you lower your AGI, you can reduce how much you’ll pay in taxes.

Certain itemized deductions

Your AGI influences how much you can deduct if you are itemizing your deductions. For example, you can only deduct medical and dental expenses that exceed 7.5% of your AGI.

Program or credit eligibility

Your AGI determines whether or not you qualify for specific tax credits or assistance programs, such as the Child and Dependent Care Credit.

Since many tax benefits have income limits or phaseouts based on your AGI, your eligibility for certain tax deductions and credits depends on that information,” said Armine Alajian, a certified public accountant (CPA) and the founder of the Alajian Group accounting firm. "I always advise folks to do thorough research on the benefits they want to claim to avoid any surprises."

State taxes

Some states use AGI as the basis for calculating how much you’ll pay in state income taxes.

» RELATED: Current Standard Deductions

How to reduce your AGI

Reducing your AGI can help you pay fewer taxes. Some of the ways you can reduce AGI include:

• Increasing contributions to an HSA
• Increasing contributions to a qualified retirement account, such as a 401(k) or an individual retirement account (IRA)
• Paying student loan interest

AGI vs. MAGI: What’s the difference?

While your AGI is your total income minus certain adjustments, your modified adjusted gross income (MAGI) is your adjusted gross income with certain deductions that must be added back in. For instance, some deductions you must add back in include:

• Student loan interest
• IRA contributions
• One-half of self-employment tax
• Tuition, fees and qualified tuition expenses

The IRS uses MAGI to determine if a taxpayer qualifies for specific tax credits, deductions or exclusions. It’s also used to determine how much a taxpayer can contribute to retirement, investment or health savings accounts and how many of these contributions a taxpayer can deduct on a tax return.

» MORE: How to File Your Taxes for Free

FAQ

Bottom line

Your AGI impacts the deductions and credits you’re eligible for and ultimately affects your taxable income. If you’re unsure what counts as income or if you need help calculating your AGI, consider working with a tax software program or a tax professional to help you identify all of your income sources and file your taxes properly.