What Is Adjusted Gross Income (AGI)?

Adjusted Gross Income (AGI) is defined as your gross income minus specific tax deductions, regardless of whether you choose to use the Standard Deduction or Itemized Deductions when filing your tax return.

AGI is a critical metric that the IRS uses to calculate many other indicators and threshold values, such as your eligibility for certain tax credits and deductions. The importance of this indicator for taxpayers cannot be overstated: generally, the lower your AGI, the lower your overall tax liability will be.

Definition and Example of Adjusted Gross Income (AGI)

In simple terms, Adjusted Gross Income is simply your total gross income minus certain expenses determined by the IRS.

After you total your full taxable income (gross income), you can make several “above-the-line” deductions to reduce the taxable amount.

What are “Above-the-Line” Deductions?

“Above-the-line” deductions are applied regardless of whether you claim Itemized Deductions or the Standard Deduction later in your return. They are also known as “Adjustments to Income” and are typically calculated using IRS Schedule 1.

The process works in two steps:

Adjustments to Income are subtracted from your Gross Income to find your AGI.
Then, Itemized Deductions or the Standard Deduction are subtracted from your AGI.

Because the Standard or Itemized deductions happen after AGI is calculated, they are often referred to as “Below-the-line Deductions.” allowing you to determine the final amount of your taxable income.

How Adjusted Gross Income Is Calculated

AGI is calculated on the first page of the federal tax return (IRS Form 1040) using information transferred from Schedule 1.

Calculating AGI is an important step because it forms the basis for determining the deductions and credits you can claim, and ultimately, the amount of income tax you must calculate and pay.

To determine your AGI, you must subtract eligible expenses from your gross income. These adjustments will reduce the total amount subject to tax. These include, among others:

Educator expenses: Such as materials needed for work by teachers.
Moving expenses: Specifically for eligible military personnel.
Health Savings Account (HSA) expenses.
Education costs: College tuition or student loan interest.
Retirement contributions: Contributions to certain retirement accounts.
Self-employed retirement: Contributions to SEP-IRA, SIMPLE IRA, and 401(k) plans for the self-employed.
Early withdrawal penalties: Penalties charged by financial institutions for early withdrawal of savings.
Alimony payments: (Subject to specific dates of divorce agreements).

If you handle your financial matters independently, IRS services or tax software will help automatically calculate your AGI. Using professional software helps avoid mathematical errors and ensures all tax calculations are performed accurately.

Note: If you don’t understand the difference between AGI and Gross Income (GI) or don’t know how to calculate it correctly, you may end up paying more tax than necessary.

Adjusted Gross Income vs. Gross Income

Before you can calculate Adjusted Gross Income, you must first determine your Gross Income. This is the total income reported on Form 1040 that you earned during the reporting tax year.

What is Included in Gross Income?

Gross income includes all income you earned as wages, as well as funds you received from other sources. It essentially covers everything you earned before taxes or deductions.

Gross income may include:

Employment income (salary, wages, bonuses).
Interest and dividends.
Long-term and short-term capital gains and losses.
Alimony received.
Pensions and annuities.
Rental property income.
Royalties.
Any income from running a business.
Online Sales: If you sold any goods on eBay, Craigslist, or another online store, you received income that must also be accounted for.
Asset Sales: Net profit from the sale of assets, such as selling a house or car.
Gig Economy: Any money received from self-employment, consulting, side jobs, and other income sources.

All these income sources are listed in the first lines of Form 1040 and Part I of Schedule 1.

Gross Income vs. Net Income

It is important not to confuse gross income with net income.

Gross Income: The total amount earned before taxes.
Net Income: Refers to wages or income earned after all withholdings, such as state and federal income tax, Social Security taxes, and pre-tax benefits (such as health insurance contributions).

Conclusion: Key Takeaways on AGI

Thus, AGI is essentially an adjustment to your gross income. It includes all sources of income but subtracts the “above-the-line” adjustments you are entitled to.

Here is what you need to focus on regarding AGI:

Taxable Baseline: AGI is your income after excluding all specific adjustments to gross income.
Eligibility Trigger: It is used to determine which deductions and credits you qualify for, directly determining the amount of taxes you will have to pay.
Calculation Order: AGI is calculated before you make Itemized Deductions or take the Standard Deduction (below-the-line adjustments).
The Foundation: It should be remembered that calculating AGI is an important step toward determining taxable income.

After you have made adjustments (subtracted above-the-line adjustments) to your gross income to calculate AGI, you can then apply further deductions to determine the final amount of your taxable income.

How Gennadiy Arnautov CPA Can Help?

Calculating Adjusted Gross Income correctly is the foundation of a healthy tax return. Missing “above-the-line” deductions means you are paying tax on money you shouldn’t be. Our specialists will help:

Identify every “above-the-line” deduction you are eligible for to lower your AGI immediately.
Differentiate between business expenses, adjustments to income, and itemized deductions to maximize your refund.
Ensure compliance with Schedule 1 and Form 1040 requirements to avoid IRS inquiries.
Plan ahead to manage your AGI for future years, keeping you eligible for valuable tax credits.

Don’t overpay the IRS due to a calculation error.

Contact Gennadiy Arnautov CPA today for professional consultation and accurate tax filing.