What Is Adjusted Gross Income (AGI) and How to Calculate it?

Posted In | Finance | Accounting Software | Gridlex Academy

Adjusted gross income (AGI) is an individual's total gross income minus certain specified deductions. This number is used to determine an individual's eligibility for certain deductions and credits and is an important number to know when preparing your tax return. Here's how to calculate your AGI and what it means.

How to Calculate your AGI? 

To calculate your AGI, start by adding up all of your income sources, including wages, salaries, tips, and self-employment income. 

 

Next, subtract any deductions that are allowed by the Internal Revenue Service (IRS), such as alimony payments, certain business expenses, and contributions to traditional individual retirement accounts (IRAs).

 

Once you've subtracted your allowable deductions, you'll have your AGI. This number is important because it's used to determine your eligibility for certain deductions and credits, such as the earned income tax credit and the child and dependent care credit. It's also used to calculate the amount of certain taxes, such as the Medicare surtax.

 

What Deductions are not Allowed when Calculating your AGI?

Keep in mind that not all deductions are allowed when calculating your AGI. For example, you can't use deductions for items like health savings account contributions, most casualty and theft losses, and certain moving expenses when determining your AGI. You'll need to add these deductions back when calculating your taxable income.

 

It's important to accurately calculate your AGI, as it can have a significant impact on your tax bill. If you're not sure how to calculate your AGI or have questions about which deductions are allowed, it's a good idea to consult a tax professional. They can help you navigate the rules and ensure that you're taking all of the deductions and credits that you're eligible for.

 

An Example of Adjusted Gross Income (AGI) Affecting Deductions

An example of how adjusted gross income (AGI) can affect deductions is the deduction for charitable donations. In order to claim this deduction, an individual must itemize their deductions on their tax return. The amount of the deduction is limited to a certain percentage of the individual's AGI, with the exact percentage depending on the type of property donated and the organization it was donated to.

 

For example, let's say that an individual has an AGI of $50,000 and donates $1,000 worth of clothing to a qualified charity. If the clothing is considered "long-term capital gain property," the individual can only claim a deduction equal to 60% of their AGI, or $30,000 in this case. This means that the individual can claim a deduction of $600 for their charitable donation (60% of $1,000), rather than the full $1,000.

 

On the other hand, if the individual had an AGI of $100,000, they would be able to claim a deduction of up to $30,000 for their charitable donation, as this is the maximum amount allowed by the IRS. In this case, the individual could claim the full $1,000 deduction for their donation.

 

As this example shows, an individual's AGI can affect the amount of the deduction they are able to claim for charitable donations. In general, the higher an individual's AGI, the lower the amount of the deduction they can claim. It's important to accurately calculate your AGI in order to maximize your deductions and minimize your tax bill.

 

Conclusion

In conclusion, adjusted gross income (AGI) is an individual's total gross income minus certain allowable deductions. It's used to determine eligibility for deductions and credits, and to calculate the amount of certain taxes. By accurately calculating your AGI, you can ensure that you're paying the right amount of tax and taking advantage of all of the deductions and credits that you're entitled to.

 

Frequently Asked Questions: 

1. What is the Formula for Adjusted Gross Income ?

The formula for calculating adjusted gross income (AGI) is:

AGI = Total gross income - Allowable deductions

 

2. What are some common adjustments used when determining AGI?

Some common adjustments that are used when determining adjusted gross income (AGI) include:

  1. Alimony payments: 
  2. Business expenses
  3. Contributions to traditional IRAs
  4. Educator expenses
  5. Health savings account contributions
  6. Student loan interest

 

3. What is modified AGI? 

Modified adjusted gross income (MAGI) is a term used in the United States to determine an individual's eligibility for certain deductions, credits, and benefits. It is calculated by adding certain income and deductions back to the individual's adjusted gross income (AGI), which is the individual's total gross income minus certain specified deductions.

 

 4. What is the difference between AGI and Modified AGI?

The main difference between adjusted gross income (AGI) and modified adjusted gross income (MAGI) is that MAGI includes certain income and deductions that are not included in AGI. AGI is an individual's total gross income minus certain specified deductions, while MAGI is calculated by adding certain income and deductions back to AGI.