Adjusted Gross Income: What It Is and How To Calculate It for Your Taxes

Allison Hache
pixdeluxe / iStock/Getty Images
pixdeluxe / iStock/Getty Images

Adjusted gross income is an important number used to determine how much you owe in taxes. It’s a factor in determining your federal tax bracket and taxable income — the portion of your income subject to federal income tax. To calculate your AGI, you subtract specific deductions from your gross income.

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When you know how to calculate your adjusted gross income, you can estimate how much tax you have to pay the government. It’s also helpful when you want to figure out when you qualify for certain deductions and tax credits that can further reduce your tax liability.

What Is Adjusted Gross Income?

Your adjusted gross income is simply your total gross income minus certain adjustments. You can find these adjustments on Schedule 1 of Form 1040, under “Part II — Adjustments to Income.” After you enter your total income from all sources, subtract the cost of the following adjustments, if applicable, to reach your adjusted gross income:

  • Educator expenses

  • Certain business expenses if you’re a reservist, performing artist or fee-basis government official

  • Health savings account contributions

  • Moving expenses, for members of the armed forces only

  • Deductible portion of self-employment tax

  • Self-employed SEP, SIMPLE and qualified plan contributions

  • Self-employed health insurance

  • Penalty on early withdrawal of savings

  • Alimony paid

  • IRA deduction

  • Student loan interest

  • Tuition and fees

Once you’ve added up your total deductions, you transfer that figure to line 10 on the front page of your Form 1040.

What Is the Difference Between Gross Income and Adjusted Gross Income?

Gross income is the total amount of money you earn before deductions like FICA tax, employer benefits and contributions to retirement funds. What’s left is your net pay. Adjusted gross income differs from both of these calculations because it’s your gross income minus specific deductions allowed by the IRS to determine your taxable income. Your net pay may differ from your adjusted gross income because it reflects deductions that are not part of the AGI calculation, such as health insurance premiums and 401(k) contributions.

How Do I Calculate My Adjusted Gross Income?

A simple way to determine your AGI is to use an adjusted gross income calculator. However, you also can calculate it manually.

First, you’ll need to add up your total income. This is your income from all sources, including wage income, salary, taxable interest and dividends, alimony, business income, IRA or pension distributions, annuity distributions, rental income, unemployment compensation, royalties, the taxable portion of Social Security benefits and other income. From this total income number, you’ll subtract your allowable adjustments to reach your AGI.

For example, let’s say you earned $60,000 in total income. You made a $2,000 deductible contribution to your IRA, paid $3,000 in student loan interest and had $5,000 in HSA contributions. In this case, your AGI would be $60,000 less $10,000 ($2,000 + $3,000 + $5,000) = $50,000. At this point, you can take the standard deduction or itemize deductions if you have enough tax deductions to surpass the value of the standard deduction. The result is your taxable income.

What Is Modified Adjusted Gross Income?

Modified adjusted gross income adds back in some of the deductions you took to calculate your AGI, such as the student loan interest deduction, IRA contribution deduction and the tuition and fees deduction. MAGI is used to calculate whether or not you qualify to make a Roth IRA contribution. This figure also determines which tax credits you can use to lower the cost of marketplace insurance plans and whether you can receive benefits from the Children’s Health Insurance Program and Medicaid.

Why Is AGI Important?

Your AGI determines whether you qualify for tax credits such as the Earned Income Tax Credit. For example, for the 2023 tax year, if you’re married filing jointly and have two qualifying children, your AGI must be $59,478 or below to qualify for the EITC. Without calculating your AGI accurately, you might overlook valuable tax deductions.

AGI also determines limits on itemized deductions and certain credits. For example, if you plan on deducting any of your medical expenses, they must exceed 7.5% of your AGI. Similarly, charitable contributions are generally limited to 50% of your AGI.

Final Take

Knowing how to calculate your adjusted gross income is helpful during tax time and throughout the year when you’re making decisions about retirement planning. It’s important to realize, though, that your tax due is not based on your adjusted gross income. That honor goes to your taxable income, which is calculated by making additional adjustments after you compute your adjusted gross income.

FAQ

  • How do I find my adjusted gross income on my W-2?

    • Your W-2 does not list your adjusted gross income, but it contains the information you need to calculate your AGI. Box 1 lists your total income earned from your employer. If you worked for more than one employer during the year, you need to add up the income you received from each one. Taking that information from the W-2s you received can make this task easier.

  • Are capital gains in adjusted gross income?

    • Yes, your adjusted gross income should reflect capital gains because the IRS views the profit as income. You add the capital gain to your gross income for the year. Short-term capital gains are taxed at the same rate as your ordinary income, but capital gains tax rates for long-term assets are lower.

  • How can I get the status of my tax refund?

    • If you're wondering how long a tax refund takes, you can check the status of your federal refund at the IRS' website as long as you have your Social Security number or individual taxpayer ID number, your filing status (single, married filing jointly, etc.) and the exact amount of your refund.

John Csiszar contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: Adjusted Gross Income: What It Is and How To Calculate It for Your Taxes

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