How to Calculate Your Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is a crucial figure used in many aspects of US tax calculations. Understanding how to calculate your AGI is essential for accurately filing your taxes and determining your eligibility for various tax benefits and deductions. This guide will walk you through the process step-by-step.
What is Adjusted Gross Income (AGI)?
AGI is your gross income less certain above-the-line deductions. Gross income is your total income from all sources before any deductions. The key difference is that AGI calculations happen before you consider itemized deductions or the standard deduction. Your AGI determines your eligibility for many deductions and credits.
Calculating Your AGI: A Step-by-Step Guide
The calculation involves two main stages: determining your gross income and then subtracting your above-the-line deductions.
1. Determine Your Gross Income: This is the sum of all your income from various sources, including:
- Wages and Salaries: Income from employment.
- Self-Employment Income: Profits from your own business.
- Interest Income: Earnings from savings accounts, bonds, etc.
- Dividend Income: Distributions from stocks.
- Capital Gains/Losses: Profits or losses from the sale of assets.
- Rental Income: Income from renting out property.
- Pension and Annuity Income: Payments from retirement plans.
- Social Security Benefits: (Note: Only a portion of Social Security benefits may be taxable depending on your income.)
- Unemployment Compensation: Benefits received while unemployed.
- Alimony Received (for divorces finalized before 2019): Payments received from a former spouse.
2. Identify Your Above-the-Line Deductions: These are deductions subtracted directly from your gross income to arrive at your AGI. Common above-the-line deductions include:
- IRA Deductions: Contributions made to a traditional Individual Retirement Account.
- Self-Employment Tax Deduction: A deduction for the self-employment taxes you paid.
- Health Savings Account (HSA) Deduction: Contributions made to a Health Savings Account.
- Student Loan Interest Deduction: Interest paid on qualified student loans.
- Tuition and Fees Deduction: (This deduction may no longer be available; check current tax laws.)
- Alimony Paid (for divorces finalized before 2019): Payments made to a former spouse.
- One-Half of Self-Employment Tax: This deduction reduces your tax burden as a self-employed individual.
3. Calculate Your AGI:
Subtract the total of your above-the-line deductions from your gross income. The result is your Adjusted Gross Income (AGI).
Formula: AGI = Gross Income - Above-the-Line Deductions
Example Calculation
Let's say your gross income is $70,000, and you have the following above-the-line deductions:
- IRA Contributions: $6,000
- Self-Employment Tax Deduction: $2,000
Your AGI calculation would be:
AGI = $70,000 - ($6,000 + $2,000) = $62,000
Why is AGI Important?
Your AGI is a critical number because it:
- Determines your eligibility for many tax deductions and credits: Many deductions and credits are based on your AGI. For example, the amount of the child tax credit you can claim depends on your AGI.
- Impacts your tax bracket: While not directly determining your tax liability, your AGI helps determine which tax bracket you fall into.
- Is used to calculate certain retirement plan contributions: Some retirement plan contribution limits are based on your AGI.
Need Further Assistance?
This guide provides a general overview. Tax laws are complex and change frequently. For personalized guidance, consider consulting a tax professional or utilizing tax software. Always refer to the most up-to-date IRS publications for the most accurate information.
