Adjusted gross income (AGI) is all over your tax return but not on your W-2 because it's your wholistic taxable income -- it isn't solely the amount of money you earned at work.
AGI is used to figure out a combination of all your credits and deductions, and CPA and TurboTax (INTU) - Get Intuit Inc. Report expert Lisa Greene-Lewis gives insight into why that's so important for your tax return.
Your gross income includes:
- Capital Gains
- Self-employment income
"And then your adjustments are the deductions that you're able to get, which are called 'above the line deductions,'" Greene-Lewis explains.
Above-the-line AGI deductions:
- Educator expenses for teachers
- Student loan debt
- Retirement contributions
So, why is AGI so important? The above deductions bring your income down so the taxable amount becomes smaller before the IRS calculates how much tax you owe.
"You want to make sure you take advantage of any of your adjustments to income. You want to get your taxable income as low as possible, lowering the taxes you owe," says Greene-Lewis.
Your AGI impacts a lot of deductions and credits that you're able to tax, such as medical expenses and charitable donation deductions.
Taxpayers are encouraged to look on their tax returns to find this number because you can see the additions and subtractions that bring you down to the number you qualify for. Your AGI can be found on the front page of form 1040.
"You also have to have your previous year's adjusted gross income when you e-file your return which the IRS put in place to avoid fraud," Greene-Lewis adds.
But looking at your previous year's AGI also provides a basis of comparison from year to year to see what you're qualifying for as you move through your credits and deductions because the limitations keep changing.
"It can even help you with planning for the next tax year," Greene-Lewis says.