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Adjusted Gross Income is simply your total gross income minus specific deductions. Additionally, Adjusted Gross Income is used by a taxpayer as the starting point for calculating taxes and determining your eligibility for certain tax credits and deductions to help lower your overall tax bill.
Read on as we outline more information about Adjusted Gross Income (AGI), how to calculate AGI, and how you, the taxpayer, might be able to reduce your AGI.
What is AGI?
AGI is simply the acronym for Adjusted Gross Income. It’s a common term in the tax and finance world, so it’s important to understand AGI’s meaning and relevance.
Essentially, AGI starts with your gross income. Then, your income is reduced through the deductions. Some common examples of deductions that reduce adjusted gross income include deductible traditional IRA contributions, health savings account contributions and educator expenses.
But what does Adjusted Gross Income mean for you in real life? Here are a few places it comes into play!
1. It serves as the starting point for calculating your federal tax liability – and your federal tax rate. (More on how to calculate AGI later in this post!)
2. It helps you better understand if you qualify for specific tax credits or deductions. (Some credits and tax deductions have specific AGI limitations.)
3. It helps determine your eligibility in other financial situations, like applying for a loan to buy property, eligibility to rent an apartment, or getting a student loan to pay for higher education.
Let’s face it, tax terminology can get a little confusing. When it comes to talking about income, several terms sound similar, but they have their own definitions and intentions.
To clarify the various ways to talk about income, let’s run through a list of the different types:
- Taxable income – Taxable income is arrived at by subtracting the standard or itemized deductions—whichever amount is greater—from your AGI. Take note on AGI vs. taxable income! These two tax terms are commonly confused with each other but represent different things. Long story short, your taxable income is what you’ll use to determine your tax bracket.
- Gross income – Gross income includes all income received from all sources and could include money, property, and the value of services received. Wages, tips, interest, dividends, rents, and pension income are also examples of sources that contribute to your gross income (not including tax-exempt income).
- Modified Adjusted Gross Income (MAGI) – This is your AGI plus a few adjustments added back in. Your Modified Adjusted Gross Income determines your eligibility for certain deductions, credits, and retirement plans. Take note: there’s no fixed definition of MAGI as the adjustments vary depending on the specific tax benefit.
What is Adjusted Gross Income on your W-2?
One common question we receive is where their Adjusted Gross Income is on their W-2. The answer is – it’s not. Because AGI is something you need to calculate from several sources it’s not printed on your W-2. But you will need your W-2 to start the calculation. See the “How to calculate AGI section” below.
How to find annual income
Sometimes when people ask about annual income, they may be thinking of their salary before or after taxes are taken out from their paychecks. You can find your annual income on your Form W-2 from your employer. If you’re looking for your AGI from last year, check out the next section.
Finding your prior-year AGI on your 1040
Your prior-year AGI can be used to validate your electronic return with the IRS. You’ll need a copy of last year’s return to locate your Adjusted Gross Income on Form 1040 from the previous tax year. For 2023, you can find the amount listed on the following lines based on the form you used. If you filed Form 1040, Form 1040-SR or 1040-NR, your AGI will be listed on Line 11.
How to calculate AGI
If you use software or an online tax prep service to prepare your tax return, it will calculate your AGI once you input your numbers. But if you want to figure it out by hand, here’s a breakdown of how to do it:
Add your total income and wages
First, you’ll begin by tallying your reported income (subject to income tax) for the year. For most people, it includes job income (ex. W-2 form or 1099s).
You might have other types of income. Here are some examples of other types of income:
- Capital gains
- Dividends
- Interest
- Passthrough income from a partnership or S corporation
- Pensions
- Rental income
- Self-employment income
- Social Security payments
- Taxable alimony payments
- Unemployment compensation
Subtract “above the line” deductions
The next step is subtracting the applicable adjustments to the income listed above from your reported income. Common (itemized deduction) adjustments include:
- Deductible alimony paid
- Educator expenses
- Health Savings Account contributions
- Military moving expenses
- Traditional IRA contributions
- Self-employed health insurance deduction
- Self-employed retirement account contributions
- Student loan interest payments
The resulting amount is your AGI. In summary, the calculation looks like this:
Gross Income – Deductions = Adjusted Gross Income
How to reduce AGI
We touched upon ways to reduce your AGI above, but let’s dive deeper, so you can take advantage of some of the more common “above the line” deductions:
1. Contribute to a Health Savings Account
If you participate in an eligible Health Savings Account, you may have the option to contribute up to $3,850 (for individuals in 2023) and $7,750 for family coverage in 2023).
Those ages 55 and up can contribute up to an additional $1,000 to their HSA. This contribution can be made until the tax deadline, so you can decide to contribute for the current year up to the tax deadline the following year.
If you haven’t reached the contribution limit for the year, it might be wise to contribute. Contributions are deductible even if you don’t itemize! In addition, HSA funds can remain in the account and don’t expire at the end of the year. Therefore, putting money into an eligible HSA could help you cover potential future out-of-pocket medical expenses using tax-free funds.
2. Retirement savings
Contributions to a traditional individual retirement savings account (IRA) can reduce your AGI dollar-for-dollar. If you have a traditional IRA, your income and any workplace retirement plan may limit the amount your AGI can be reduced. The deduction’s upper limit is $6,500 ($7,500 or those over 50 years old). Learn more about tax topics related to retirement income.
3. Student loan interest deduction
Student loan interest is interest paid during the year on a qualified student loan. The student loan interest deduction is another adjustment to your AGI. The maximum deduction you can claim is $2,500 this year – but it’s limited by your income. So, if your filing status is Single, Head of Household, or Qualified Widower, and your modified AGI is more than $90,000 in 2023, you don’t qualify. If you’re Married Filing Jointly and make more than $185,000 in 2023, you also can’t use this deduction to lower your AGI.
4. Educator expenses
Teachers often incur out-of-pocket expenses each school year. Luckily, there’s a tax advantage if you spend your own money on class or classroom costs. That’s right—Educator expenses can reduce your AGI by offering a tax deduction of up to $300 (for 2022) for qualified K-12 purchases like books, instructional supplies, classroom technology, and supplementary items used for the classroom. The deduction is up to $600 (for 2022) if an educator is married to another eligible educator and filing under the status married filing jointly (up to $300 per person combined).
Get help with your tax filing and reducing your AGI
By taking advantage of one – or more – of these tax strategies before the end of the year, you could potentially help with reducing your taxable income.
Ready to file your taxes? H&R Block can help. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll help you get your max refund.
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