Adjusted gross income, or AGI, is extremely important for filing your annual income taxes. More specifically, it appears on your Form 1040 and helps determine which deductions and credits you are eligible for. Based on the amount of your AGI, you can then figure out how much you’ll owe in income taxes. Starting for the 2019 tax year, your AGI is on line 8b of the newly redesigned IRS Form 1040.
As you take care of your taxes, make sure you have an adequate financial plan in place. Talk to a financial advisor today.
Understanding Adjusted Gross Income (AGI)
Adjusted gross income (AGI) is a variation of your gross income that accounts for certain deductions that usually make it lower than your gross income. By contrast, gross income is the total amount of money you earn in a year before income taxes or other deductions are taken out. Because of this distinction, AGI is typically the foundation for calculating how much you’ll owe in taxes.
Your AGI heavily affects what deductions and credits you’re eligible for in a tax year. For example, if you have a low AGI, you’ll likely be able to claim more in deductions and credits than someone with a higher AGI.
How to Calculate Your AGI
To determine your adjusted gross income, start with your gross income. This includes wages or salary from a job, bank account interest, stock dividends and rental property income. If you reported self-employment business income on Schedule C, you’d include that in your gross income as well. Bonuses, tips, alimony and even gambling winnings are also part of gross income. You generally do not include life insurance payments, child support, loan proceeds, inheritances or gifts in your AGI, though.
One example of a payment you may be able to subtract from your gross income is a contribution to a qualified retirement account, such as an IRA. Other permissible subtractions may include interest on student loans, alimony payments, contributions to health savings accounts (HSAs) and certain kinds of moving expenses. In turn, AGI is the result of taking all of these adjustments from your gross income.
Online tax preparation services and software programs both calculate AGI for you and automatically enter it into the correct line. Regardless, make sure you enter these amounts correctly when transferring the information from the forms your employer gives you to the Form 1040.
How Your Adjusted Gross Income Affects Your Taxes
Your adjusted gross income affects the extent to which you can use deductions and credits to reduce your taxable income. For instance, consider the effect of AGI on medical and dental expenses for taxpayers who itemize.
Those who itemize can deduct only the amount of qualified medical and dental expenses that are higher than a certain percentage of their adjusted gross income. Beginning in 2019, this limit was raised to 10% of your AGI. This means that if your medical and dental expenses don’t exceed 10% of your AGI, you likely won’t be able to deduct them at all.
AGI-related limits also apply to deductions for tuition and charitable contributions. You can generally deduct qualified charitable contributions you made only until the deduction amount reaches 50% of your AGI. Therefore, your AGI has a significant effect on which deductions and credits you can take, as well as how much they’re worth.
Your adjusted gross income is especially important if you live in a state that collects state income taxes. Many states use the AGI from your federal return as the starting point for state income tax calculations.
Differences Between AGI, MAGI and Taxable Income
Your AGI is not the income figure on which the IRS will actually tax you. Your final income number, or “taxable income,” comes from subtracting even more deductions from your AGI.
For the 2019 tax year, the vast majority of taxpayers will likely use the standard deduction rather than itemize deductions. Under current laws, the standard deduction will be $12,400 for single filers and $24,800 for married couples filing jointly.
Modified adjusted gross income, or MAGI, is another term related to taxable income and adjusted gross income. MAGI comes into play when you’re trying to figure out whether you qualify for certain deductions. For instance, if your MAGI is above certain income limits and you have a workplace retirement plan, you may not be able to take the full deduction for contributing to an IRA.
To calculate your MAGI, you add certain deductions back to your adjusted gross income, such as student loan interest. If you didn’t claim any of these deductions, your AGI and MAGI should be the same.
Calculating your AGI is a crucial step towards finding out how much of your income is taxable. It can be relatively simple if you have a good idea of what parts of your income constitute the figure. With changing tax laws and forms, however, some of these situations can get tricky. It’s smart to work with an accountant or use a reliable tax software program to help you out. Also, many financial advisors offer tax planning and tax preparation services.
Financial Planning Tips
- If your tax situation is complex or you want advice on investing and financial planning, try speaking with a financial advisor. SmartAsset’s free tool can match you with up to three financial advisors in your area in just five minutes. Get started now.
- One of the best ways to take care of your money is to set a monthly budget for you and your family. Stop by SmartAsset’s free budget calculator to begin building a plan for yourself.
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