The phrase "adjusted gross income" sounds pretty dull. But, it's the most important single number on your tax return. If you don't understand what it is, you may end up paying more taxes than you need to. Let's go over what it is and how to calculate adjusted gross income.
Adjusted gross income (AGI) is the number you get after you subtract your adjustments to income from your gross income. The IRS limits some of your personal income tax deductions based on a percentage of your AGI.
That's why it's so important. Your individual AGI levels can also reduce your personal taxable deductions and exemptions. Many states also base their state income taxes on your federal AGI. The AGI calculation is at the bottom of Form 1040 in line 37.
Now that you know what an AGI is, let’s take a closer look at how to calculate adjusted gross income.
Use this adjusted gross income formula to determine your AGI:
Alternatively, you can also use an AGI calculator. These are available online and will do the calculating for you.
Above-the-line deductions include the following:
Self-employed workers can take advantage of above-the-line deductions. If you increase these deductions, you can lower the taxes you need to pay.
If you have other personal deductions that aren't on the list (such as capital gains), you must deduct them as itemized deductions. Use the IRS Schedule A for this. Many of these deductions are deductible only if, and to the extent, they exceed a specified percentage of your AGI. Thus, the greater your AGI, the less you can deduct.
Losing part of your itemized deductions is terrible, but it can get even worse. Many itemized deductions get reduced if your AGI exceeds certain levels.