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What Is Adjusted Gross Income (AGI)?

By Nick Zarzycki on November 6, 2018

“Adjusted gross income”—could they have picked a more boring-sounding name for the most important number on your tax return?

Adjusted gross income (AGI) is the starting point for all of your tax calculations. Getting it right is crucial if you want to minimize your total taxable income, and getting it wrong might mean having to redo your whole return.

In this article we’ll explain exactly what AGI is, how to calculate it, and how it’s used to calculate your taxes.

What is adjusted gross income?

AGI is all the money you made during your fiscal year, minus adjustments to income—things like retirement plan contributions, student loan interest, and some business expenses.

The resulting number is your AGI, which is the starting point for calculating your federal taxes. (Your state tax return, if you have to file one, will also use this number as a starting point.)

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How to calculate AGI

The first step to calculating your AGI is to figure out your gross income—your total income for that year. On the new Form 1040 for 2018, this means adding up line 1 through 5.

2018 IRS Form 1040

Once you’ve calculated your gross income (line 6), refer to the “Adjustments to Income” section of Schedule 1 of Form 1040 for a list of all the possible adjustments to income you can make.

To come up with your AGI, you need to subtract these adjustments from your gross income.

Here’s a list of every possible adjustment you’ll be able to make on your 2018 return, including links to IRS resources about claiming each of them:

Keep in mind that Form 1040 has phased out some adjustments to income for 2018 (specifically the “tuition and fees” and “domestic production activities” deductions).

For detailed, up to date information about making each adjustment, check out page 87 of this guide to the 2018 version of Form 1040.

How AGI is used to calculate taxes

AGI is used to calculate your taxes in two ways:

  1. It’s the starting point for calculating your taxable income—that is, the income you pay taxes on. To get taxable income, take your AGI and subtract all of the deductions, credits and exemptions you’re eligible for that year.

  2. If your AGI is high enough, you become ineligible for certain deductions or credits. A fancy tax term for this is that they have an “AGI threshold.”

Some examples of AGI thresholds include:

  • The threshold on miscellaneous expenses, which you can only deduct if their sum is more than two percent of your adjusted gross income.

  • When making charitable contribution deductions, you can generally deduct up to 50% of your adjusted gross income.

  • You can claim unreimbursed medical and dental expenses if they are 7.5% or more of your AGI.

What is Modified Adjusted Gross Income (MAGI)?

But wait, there’s more!

The IRS might require you to adjust your adjusted gross income even more by adding back certain adjustments to get your “modified adjusted gross income,” or MAGI.

Many people don’t end up having to add any of these adjustments back in, and their MAGI ends up being the same as their AGI. But if you earned any tax-exempt interest or received any social security benefits not included in gross income under section 86 of the U.S. Tax Code this year, your MAGI might be different from your AGI.

Like your AGI, your MAGI can also affect your deductions and credits—for example, your deduction for contributions to a traditional IRA is phased out if your MAGI reaches a certain level.

The IRS provides a handy worksheet for figuring out your MAGI here.

Cartoon illustration of an income statement

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Get organized and skip the stress. This tax checklist tells you everything you need to file on time—customized for your business.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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