What is Adjusted Gross Income (AGI)?
Adjusted Gross Income (AGI) is one of the most important numbers on your tax return. Understanding what it is and how it's calculated can help you better plan your taxes.
Definition
AGI is your total gross income minus specific deductions (called "above-the-line" deductions). It's calculated before you take the standard deduction or itemized deductions.
How AGI is Calculated
To calculate your AGI:
- Start with your total gross income (wages, interest, dividends, business income, etc.)
- Subtract above-the-line deductions such as:
- Educator expenses
- Student loan interest
- Traditional IRA contributions
- Health savings account (HSA) contributions
- Self-employment tax deduction
Why AGI Matters
Your AGI is used to determine:
- Eligibility for certain tax credits and deductions
- Your ability to contribute to Roth IRAs
- Medicare premiums
- Various phase-out thresholds for tax benefits
Understanding your AGI can help you make strategic financial decisions throughout the year.