Adjusted Gross Income (AGI) and How to Calculate it

Adjusted gross income involves taking several different deductions from your income. How does AGI impact your tax return?

Doing your own taxes certainly isn't fun, but it's entirely doable provided you have all the necessary information at the ready. Using that, you'll be able to not only input that info but use it to make certain calculations. And filing online has made the process easier than ever.

You'll need to report several different forms of income on your tax return. One of the more important ones to know is your adjusted gross income (AGI). Your AGI can determine the number of factors for the rest of your tax return, potentially impacting what your taxable income is in the process.

Understanding AGI is one of the first things you'll need to understand for filing taxes, and as the deadline for filing fast approaches, it's more prudent than ever that you know. So what is adjusted gross income, how can it affect the rest of your taxes and how do you calculate it?

What Is Adjusted Gross Income?

Adjusted gross income is your gross income, that is, all the income you made within the last year (wages as reported in your W2, qualified dividends, taxable interest, alimony, real estate profit, unemployment benefits, Social Security payments, etc.), but adjusted to reflect certain expenses incurred throughout the year. Depending on your income and the expenses, this may reduce your taxable income fairly significantly.

Calculating AGI occurs very early on in filling out your 1040 Form, meaning the adjustments made to your taxable income for AGI are made before determining other tax deductions, tax credits and tax exemptions.

Adjusted gross income is also something of a midpoint between your total income and your taxable income. Subtracting certain expenses and deductions from total income gets you your AGI; subtracting further deductions from that (like a business income deduction) will get you to your taxable income.

How to Calculate Adjusted Gross Income

Figuring out your adjusted gross income will happen on the aforementioned Form 1040. The 1040 is the centerpiece of your tax return, providing the IRS with your total income, adjustable gross income, tax deductions, tax credits and if you qualify for one, a tax refund.

Very recently, the 1040 got an incredibly simplifying makeover. The form by itself is now two relatively short pages to provide the necessary personal information and income information. Anything that has to be added that doesn't have a line in the form can be put into 1 of the 6 "schedules," or add-on forms to the 1040 the IRS offers. For AGI, you will need both the 1040 Form and Schedule 1.

Have all your income information at the ready as you begin filling out Form 1040. Relevant income information gets filled out on the second page, as lines 1-5 on the form involve inputting income. Line 1 is for your wages (with the relevant W2 forms attached). From there, should you have any of the following you will need to put income you have made from interest, dividends, IRAs, pensions, annuities and Social Security benefits.

After this, you should look to Schedule 1. The first half of the form is for "Additional Income," income made from means besides the ones on the initial form. This can include:

  • Alimony received
  • Taxable refunds
  • Business income
  • Capital gains
  • Unemployment
  • Rental income

Among other options available on Schedule 1, as well as an "Other income" line for anything else that applies but is not specifically mentioned. Some forms of income will warrant another form attached as proof.

With this, you can add up the first five lines from Form 1040 and the other forms of income on Schedule 1, and input them on line 6 of 1040 as your total income.

Line 7 is for adjusted gross income. Return to Schedule 1 and you'll notice that the second half of the page is "Adjustments to Income." Here, lines 23-35 are reserved for specific deductions the IRS considers "above the line" that can be removed from your total income. This includes:

  • Student loan interest deduction
  • Health savings account (HSA) deduction
  • Alimony paid
  • Educator expenses
  • Self-employed health insurance deduction
  • IRA deduction

When you've input your qualifying income adjustments, add them up and put the sum in line 36 of Schedule 1. Back on the initial 1040 Form, line 7 is where you subtract those income adjustments from your total income (line 6 minus line 36), to get the number that is your adjusted gross income.

How your AGI varies from your total income will depend on the adjustments you need to make. Some people will have a lot of adjustments to make; some may not have any at all and could end up with an AGI identical to their total income.

Effects of Adjusted Gross Income

If you have enough adjustments to your income you could potentially end up with a lower AGI than you anticipated. Depending on the tax deductions and credits you want to claim, that could work out in your favor. For example, if you have a qualifying medical expense you're hoping to get deducted from last year, it has to exceed 7.5% of your adjusted gross income (starting on Jan. 1, 2019, it became 10%).

Let's say you have $6,000 in qualifying medical expenses and your AGI came out to $55,000. 7.5% of $55,000 is $4,125, meaning any expenses that exceed that figure can be deducted. In this case, that means your deduction is 6,000-4,125, which comes out to $1,875. But if your AGI was $40,000, it would be any expense that exceeds $3,000, meaning your deduction would be $3,000.

Medical expense deductions are far from the only thing that AGI has an impact on. Many tax credits are dependent on your AGI, as well as how much specifically you are eligible to receive. Often, the amount you can claim via tax credits starts to get phased out once you hit a certain AGI, and if you surpass a larger figure you cease to be eligible for that credit.

What Is Modified Adjusted Gross Income?

Eligibility of other tax deductions is based not on adjusted gross income, but by modified adjusted gross income (MAGI). For example, whether or not you can take a deduction from your IRA is determined by your MAGI. What's the difference between AGI and MAGI?

Well actually, calculating AGI already gets you awfully close to calculating MAGI since you already went from gross income to adjusted gross income. Modified adjusted gross income is adjusted gross income, but with some of those deductions put back into the figure. This can mean adding student loan interest, tuition deductions, IRA contributions, foreign-earned income, or passive income or loss.

The changes from AGI to MAGI may impact your taxes and the credits you're eligible for greatly. For many people, though, this does not end up being a massive difference.