Updated February 2020
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 your 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 deductions based on a percentage of your AGI.
That’s why it’s so important. Your AGI levels can also reduce your personal deductions and exemptions. Many states also base their state income taxes on your federal AGI. The AGI calculation is on page one of Form 1040 in line 8b.
Here’s how you work out your AGI:
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 your taxes.
Figuring out one’s AGI is somewhat straightforward, but changing IRS rules sometimes makes it confusing. Here’s an example of how it could work for a single person with a total income of $120,000 and the following qualifying above-the-line deductions:
Your adjustments total $35,250. Subtract the adjusted total from $120,000 and your AGI is $84,750.
If you have other personal deductions that aren’t on the list, 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.
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