Adjusted gross income, otherwise referred to as AGI, is the starting point of your tax calculation.
Your AGI minus certain adjustments, and allowable tax credits calculate your taxable income.
Your taxable income is the final number used to calculate your tax amount due.
Your AGI appears on the form 1040, for 2020 it is line 8b (note the line number may change from year to year, however, it will always state the name on the line as “Adjusted Gross Income”
Your AGI will never exceed the total income entered on the first line of your tax return (form 1040 line 7b).
Total income is made up of all earnings subject to income tax such as:
- W-2 Wages
- Self-employment income from your Schedule C (from you’re business)
- Rental income
- Taxable Interest and dividends
- Taxable alimony payments
- Capital gains
- Any other income received that isn’t explicitly tax exempt
The deductions you take to calculate AGI are called “adjustments to income.” The IRS allows you to use specific expenses to reduce your total income. You may have heard these called “above the line” deductions
As you may know the tax laws change from year to year, but some examples of adjustments to income include:
- Educator expenses (for teachers)
- Student loan interest and tuition payments.
- Contributions to IRA accounts.
Deducting your eligible adjustments from your total income results in your AGI.
What is AGI used for?
Your AGI is the basis for which many tax deductions and credits may be calculated or qualified by, for example, if you itemize your deductions, you could deduct unreimbursed medical expenses, but only the amount which is more than 7.5% of your AGI.
Another example is the stimulus checks that were sent out due to Covid-19 in 2020. The amount each household received was based on their AGI for the most recently filed tax year.
When making charitable contribution deductions, you can generally deduct up to 50% of your adjusted gross income.
(but only if your itemizing your deductions)
Your AGI is a good number to know, many things use AGI to qualify you such as any type of financial loans, free and reduced meals for your children at school, many institutions will ask you for your taxes to obtain this number before they approve you for many different things.
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