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This article was fact-checked by our editors and Rachel Weatherly, tax product specialist with Credit Karma Tax®. It has been updated for the 2020 tax year.
Adjusted gross income is all your income (for example, wages, capital gains and interest on investments) minus adjustments the federal government allows you to make to reduce your income.
Calculating your adjusted gross income, or AGI, is the first step toward determining how much tax you’ll pay.
Once you know your AGI, you can start calculating your taxable income — that’s the amount of your income that could be subject to tax. Taxable income determines your tax bracket and your tax rate. Your AGI can also help determine your eligibility for certain tax deductions and credits.
In this article, we’ll look at AGI, how it’s calculated and what to do with it.
- What is gross income?
- How do I calculate adjusted gross income?
- What are other levels of income?
- How does AGI affect credits and deductions?
What is gross income?
To define adjusted gross income, you first need to understand gross income. Gross income is all the income you receive in a year, and it can include wages an employer pays you (which typically appear on your W-2 form), money you made working for yourself, interest on financial accounts, and other sources of personal revenue or gain.
But your total income is not necessarily all the income you’ll have to pay tax on. That’s where adjusted gross income comes in.
How do I calculate adjusted gross income?
To calculate your adjusted gross income, you’ll start with your gross income and subtract certain adjustments. When you’re filling out IRS Form 1040 federal income tax return, you’ll calculate your AGI on lines 1 through 8.
Here are some adjustments to income that help you arrive at your AGI (there are others not listed here).
Some student loan borrowers can deduct up to $2,500 of interest they paid during the year on a qualified student loan. Your deduction may be limited based on your filing status and modified adjusted gross income.
Taxpayers with a single-person high-deductible health plan can contribute up to $3,550 to a health savings account. If you have a family health plan, you can contribute up to $7,100. For 2021, those contribution limits are $3,600 and $7,200, respectively.
If you contributed to a traditional IRA during the year, you might be able to take an adjustment for some or all of your contributions. The amount you can subtract will depend on your modified adjusted gross income, or MAGI (more on that in a bit).
Eligible educators can deduct up to $250 of qualified and unreimbursed expenses. Those expenses include books, supplies, equipment, materials and professional-development courses.
You can count certain moving expenses if you’re an active-duty servicemember and are moving by military order to a permanent change of station. Some of these expenses include travel and lodging, along with transportation for your personal belongings.
You can take an adjustment for alimony payments you’ve made to a former spouse — but only if the alimony occurred on or before Dec. 31, 2018.
You can lose the adjustment for alimony paid before that date as well if the agreement is later modified and specifically updated to note that the new rule applies.
What are other levels of income?
We’ve already discussed three types of income in depth: gross income, adjusted gross income and taxable income. But there are more you might come across when you’re filing your taxes.
- Net income: If you’re a business owner, your taxable income may be determined on your net income after expenses, rather than on your gross income.
- Modified adjusted gross income: Also called MAGI, this is your AGI plus some deductions added back in. Your MAGI is another number the tax code uses to determine if you qualify for certain tax breaks.
How does AGI affect credits and deductions?
Once you know your AGI, you can use it to find out if you can take advantage of certain tax credits and deductions to reduce your taxable income.
But keep in mind that some deductions and credits, including the child tax credit, may be based on your MAGI instead.
To calculate your MAGI, take your AGI and add back in the following adjustments:
- IRA deduction
- Student loan interest deduction
- Domestic production activities deduction
- Foreign earned income exclusion
- Foreign housing exclusion or deduction
- Exclusion of qualified savings bond interest
- Exclusion of employer-provided adoption benefits
Once you decide whether you’ll take the standard deduction or itemize your deductions, you’ll subtract that total deduction amount from your AGI to get your taxable income.
If your state has an income tax and you need to file a state return, you’ll typically also use your AGI as the starting point for your state return. You’ll then apply any state-based deductions, adjustments and credits to get your state taxable income.
Your adjusted gross income is a key figure to know when you’re filing your federal tax return, and it’s often the starting point for determining state income taxes. Not only is it important to know how to calculate it, but it’s also a good idea to know which tax breaks may be limited based on your AGI.
And there’s another reason why knowing your adjusted gross income is so important — if you do your own taxes and e-file, you’ll need to know your prior year’s AGI in order to validate your return. Credit Karma Tax®, a free online tax-preparation service, can furnish your prior year’s AGI for you if you used it to file your federal income tax return last year.
Relevant sources: IRS Definition of Adjusted Gross Income | Form 1040 Instructions | Form 1040 U.S. Individual Income Tax Return (2019) | Schedule 1, Form 1040 or 1040-SR | IRS Topic No. 450 Adjustments to Income | IRS Topic No. 451 Individual Retirement Arrangements (IRAs) | IRS Topic No. 455 Moving Expenses for Members of the Armed Forces | IRS Topic No. 456 Student Loan Interest Deduction | IRS Topic No. 458 Educator Expense Deduction | IRS Topic No. 452 Alimony and Separate Maintenance | IRS Publication 969 (2019) Health Savings Accounts and Other Tax-Favored Health Plans | IRS Publication 590-A (2019) Contributions to Individual Retirement Arrangements (IRAs)
Rachel Weatherly is a tax product specialist with Credit Karma Tax®. She studied accounting and finance at Western Carolina University and has also worked as a tax analyst. You can find her on LinkedIn.