What is adjusted gross income?
Adjusted gross income (AGI) is an important number on your federal income tax return. It includes all the money you made during the year, minus adjustments to income—things like retirement plan contributions, student loan interest, and some health insurance premiums.
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, also uses this number as a starting point.)
How to calculate AGI
The first step to calculating your AGI is to figure out your gross income—your total income for the tax year. This includes wages, interest and dividend income, taxable retirement income, and capital gains. On Form 1040, this means adding up line 1 through 7a.
Once you’ve calculated your gross income (line 7b), 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 subtract these adjustments, also known as “above-the-line deductions,” from your gross income.
Here’s a list of every possible adjustment you’ll be able to make on your 2019 return, including links to IRS resources about claiming each of them:
- Educator expenses
- Certain business expenses of reservists, performing artists, and fee-basis government officials (from Form 2106)
- Health savings account deduction (from Form 8889)
- Moving expenses for members of the armed forces (from Form 3903)
- Deductible part of self-employment tax
- Self-employed SEP, SIMPLE, and other qualified retirement accounts
- Self-employed health insurance deduction
- Penalty on early withdrawal of savings
- Alimony payments
- IRA deduction
- Student loan interest deduction
- Tuition and fees deduction (Form 8917)
Keep in mind that some adjustments to income that used reduce AGI are no longer available. Specifically, the domestic production activities deduction was phased out with the passage of the Tax Cuts and Jobs Act of 2017. The tuition and fees deduction was set to expire at the end of 2018, but a last-minute spending bill passed by Congress in December of 2019 renewed that deduction through 2020.
For detailed, up to date information about making each adjustment, check out the IRS Instructions for Form 1040.
How AGI is used to calculate taxes
AGI is used to calculate your taxes in two ways:
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 either the standard deduction or itemized deductions and the qualified business income deduction, if applicable.
If your AGI is high enough, you become ineligible for certain tax deductions or credits. A fancy tax term for this is that they have an “AGI threshold.”
Some examples of AGI thresholds include:
When making charitable contribution deductions, you can generally deduct up to 50% of your adjusted gross income.
You can claim unreimbursed medical expenses if they are 7.5% or more of your AGI.
Tax breaks for education, such as the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the student loan interest deduction are limited or completely eliminated if your AGI is too high.
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, if your MAGI is too high and you have access to an employer-sponsored retirement plan at work, you may not be able to deduct contributions to a traditional IRA or make any contributions to a Roth IRA.
Now you see why many people consider AGI to be one of the most important numbers on your return!