You will see the term “adjusted gross income (AGI)” repeated on all of your tax forms.
Adjusted gross income is your gross income, which includes wages, dividends, alimony, capital gains, and retirement distributions, minus certain payments you made during the year, such as interest on student loans or contributions to a traditional individual retirement account.
The result, your AGI, becomes the starting point for calculating your tax bill. From there, you’ll subtract your allowable exemptions, credits, and deductions to determine the amount you’ll pay taxes on – that’s your taxable income.
- If you have to file a state tax return, you will generally use your federal AGI as a starting point as well. Credits and deductions specific to your state are determined to determine your state’s taxable income.
- Finally, AGI is the basis for many deductions and credits. For example, you can deduct unreimbursed medical expenses, but only when the losses are more than 7.5% of your AGI. The lower your AGI, the higher the deduction.
- If you file taxes online, the software will calculate your AGI for you.
Available settings vary by tax form
Only taxpayers who file Form 1040 have access to all of the credits and deductions that reduce AGI, such as after-tax contributions to their Health Savings Account.
If you file Form 1040A, you still have access to some adjustments. Although these are subject to change from year to year, the available adjustments tend to include things like:
How Adjusted Gross Income 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 be deducted only for amounts greater than 7.5% of your AGI. In other words, a lower AGI sets a lower threshold for deductible costs.
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 calculating MAGI can reduce or eliminate adjustments to your AGI.
What is Modified AGI, or MAGI?
If you are filing Form 1040 and itemizing deductions, such as tax-exempt interest or Social Security benefits, you must also calculate your MAGI. The calculation will add some of these amounts again. MAGI then acts as a baseline to determine the level of phase-out of some tax credits and savings strategies.
However, if you are filing Form 1040A, your MAGI is the same as your AGI.