Adjusted Gross Income (AGI)

What is Adjusted Gross Income (AGI)?

Adjusted Gross Income (AGI) is an individual’s total gross income from all sources minus specific allowable deductions. It serves as the foundation for calculating taxable income under many income tax systems, including the United States Internal Revenue Code.

Key Takeaways

• AGI is the starting point for determining taxable income.
• Calculated by subtracting allowable deductions from gross income.
• Used to determine eligibility for tax credits and deductions.
• Reported on tax returns (e.g., IRS Form 1040 in the U.S.).
• Influences total tax liability, refunds, and qualification for benefits.

Understanding Adjusted Gross Income (AGI)

AGI provides a standardized measure of income that governments use to assess tax liability fairly across different taxpayers. It includes all sources of income — such as wages, self-employment income, interest, dividends, rental income, and capital gains — but excludes certain adjustments (also called above-the-line deductions).

Common deductions subtracted from gross income to calculate AGI include:

• Student loan interest
• Retirement plan contributions (e.g., IRA)
• Health savings account (HSA) contributions
• Educator expenses
• Alimony payments (for older agreements)
• Self-employment tax deductions

After AGI is determined, further deductions (standard or itemized) are applied to compute taxable income.

Formula (If Applicable)

Adjusted Gross Income (AGI) = Gross Income – Adjustments to Income

Example Calculation:

If a taxpayer earns:

• Gross Income: $90,000
• IRA Contribution: $5,000
• Student Loan Interest: $1,000

Then:
AGI = $90,000 – ($5,000 + $1,000) = $84,000

This figure forms the basis for determining tax credits and liabilities.

Real-World Example

• In the United States, AGI is reported on IRS Form 1040 and used to determine eligibility for programs such as the Child Tax Credit, Earned Income Tax Credit (EITC), and education-related deductions.
• For example, a taxpayer with a high AGI may face phaseouts — meaning reduced eligibility for specific deductions or credits due to income limits.

Globally, similar measures exist, such as “net assessable income” in Australia or “taxable income before allowances” in the U.K., serving the same purpose of adjusting gross earnings to reflect taxable reality.

Importance in Business or Economics

AGI plays a critical role in personal finance, taxation policy, and economic equity. It:

• Determines how much tax an individual owes.
• Influences eligibility for government benefits and tax incentives.
• Serves as a key metric for income distribution analysis in public policy.
• Helps economists measure household disposable income and its effect on consumption and savings behavior.

For financial planning, understanding AGI allows individuals to optimize deductions and manage their taxable burden efficiently.

Types or Variations

• Gross Income: Total income before any deductions.
• Adjusted Gross Income (AGI): Income after specific above-the-line deductions.
• Modified Adjusted Gross Income (MAGI): AGI adjusted further for eligibility-based calculations (e.g., IRA, Medicare, or ACA subsidies).

Related Terms

• Gross Income
• Taxable Income
• Modified Adjusted Gross Income (MAGI)
• Standard Deduction
• Tax Credits

Sources and Further Reading

• Internal Revenue Service (IRS): https://www.irs.gov
• Investopedia – Adjusted Gross Income (AGI): https://www.investopedia.com/terms/a/agi.asp
• U.S. Department of the Treasury – Tax Policy and Statistics: https://home.treasury.gov

Quick Reference

• Formula: AGI = Gross Income – Adjustments.
• Used For: Determining taxable income and benefit eligibility.
• Key Adjustments: IRA, HSA, student loans, alimony.
• Filed On: Tax returns (Form 1040).
• Impact: Influences total tax owed and refund eligibility.

Frequently Asked Questions (FAQs)