AGI is short for “adjusted gross income.” This number appears on your Form 1040 and helps determine which deductions and credits you can take and therefore how much tax you finally pay. For tax year 2019 (what you file in early 2020), your AGI goes on line 7 of the newly redesigned Form 1040.
Online services or tax preparation software programs calculate the figure for you and automatically enters it into the correct line. It’s always important to enter your amounts correctly when transferring the information from the forms your employer gives you to the Form 1040.
To determine your adjusted gross income, start with your gross income. This figure sums up all the taxable income you report for income tax purposes. It 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.
From gross income you then subtract specific amounts, or make “adjustments,” to get to your AGI. One common example of a payment you may be able to subtract from gross income in order to calculate AGI 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 and certain kinds of moving expenses. If you are self-employed you can also subtract half of the self-employment taxes you paid. These adjustments are tallied up on Schedule 1. They’re considered “above the line” deductions. This means you can use them even if you’re taking the standard deduction (as opposed to itemizing deductions).
The result of taking all of these subtractions from your gross income is your AGI.
How to Use AGI
For instance, consider the effect of AGI on medical and dental expenses for taxpayers who itemize. Taxpayers 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. For tax year 2018, that percentage was 7.5% of AGI. Beginning in 2019, it went up to 10% of 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. So your AGI has a significant effect on which deductions and credits you can take as well as how much you can take. Your adjusted gross income is also important to note 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.
AGI, Taxable Income and MAGI
Your AGI is not the income figure on which the IRS will actually tax you. Your final income number – taxable income – comes from subtracting yet more deductions from your adjusted gross income.
For the 2018 tax year, the vast majority of taxpayers will likely use the standard deduction rather than itemize deductions. The change is due to the increase in the standard deduction resulting from the 2017 federal income tax law change.
Under the new law, the standard deduction will be $12,400 for single filers and $24,800 for married couples filing jointly beginning in tax year 2019. That’s nearly twice as much as the standard deduction was before the law. For most taxpayers, the new standard deduction will be higher than the total itemized deductions they might have otherwise claimed.
MAGI comes into play to figure out whether a taxpayer qualifies 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 adjusted gross income (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 account or use a reliable tax software program.
If your financial situation is complex, or if you want advice on investing and financial planning, you may be better off working with a financial advisor. SmartAsset can help you find an advisor near you. Just answer some questions about your financial situation and goals, and our tool will match you with up to three advisors in your area.
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