What is Adjusted Gross Income (AGI)? The answer will help you with your taxes

You will see the term “adjusted gross income (AGI)” repeated throughout your tax forms.

To get your adjusted gross income, you subtract any payments you made during the year that aren’t taxable, such as alimony or contributions to a traditional IRA.

The result – your AGI – becomes the starting point for calculating your tax bill. From there, you subtract your allowable exemptions and deductions to find the amount you will pay tax on: this is your taxable income.

If you need to file a state tax return, it will usually also use your federal AGI as a starting point. Credits and deductions specific to your state are then taken into account to determine your taxable income in the state.

Finally, the AGI is the basis of many deductions and credits. For example, you can deduct unreimbursed losses from fire or theft, but only when the losses exceed 10% of your AGI. The lower your AGI, the bigger the deduction.

If you file taxes online, the software will calculate your AGI for you.

Available adjustments vary by tax form

Only taxpayers who file Form 1040 have access to all available credits and deductions that reduce AGI, such as after-tax contributions to your Health Savings Account and certain moving expenses.

If you file Form 1040A, you still have access to some available adjustments, but not all. While these are subject to change from year to year, the adjustments available tend to include things like:

  • Certain contributions to the pension plan
  • Tuition and Fees
  • Interest paid on student loans
  • Educator expenses

If you file Form 1040EZ, you cannot make any adjustments; your total gross income and your AGI are the same.

(In addition to AGI adjustments, there are other considerations that determine which tax form to use.)

How AGI is used when calculating taxes

Some of the itemized deductions you can claim when filing Form 1040 or Form 1040A may be limited by the amount of your AGI. Medical and dental expenses, for example, can only be deducted for amounts over 7.5% of your AGI. In other words, a lower AGI establishes a lower threshold for deductible costs.

AGI limits also apply to the miscellaneous itemized expense category.

In one of the ironies of the tax code, even your income adjustments are subject to AGI limitations. For example, the amount of tuition you can deduct depends on your modified adjusted gross income, or MAGI. And MAGI calculation can reduce or eliminate your AGI adjustments.

What is Modified AGI or MAGI?

If you file Form 1040 and itemize deductions, such as tax-exempt interest or Social Security benefits, you must also calculate your modified adjusted gross income, or MAGI. The calculation will add some of these amounts. Next, MAGI serves as the basis for determining the level of phasing out of certain tax saving credits and strategies.

If you file Form 1040A, however, your MAGI is the same as your AGI.

This article first appeared on NerdWallet.

Comments are closed.