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.
What is 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.
How to calculate your AGI
Here’s how you work out your AGI:
- Start with your gross income. Income is on lines 7-22 of Form 1040
- Add these together to arrive at your total income
- Subtract your adjustments from your total income (also called “above-the-line deductions”)
- You have your AGI
AGI above-the-line deductions
Above-the-line deductions include the following:
- Educator expenses (a deduction for certain expenses paid by teachers)
- Certain job expenses of performing artists
- Unreimbursed job expenses of state and local officials paid on a fee basis
- Health savings account deduction
- 50% of the self-employment taxes you paid (Social Security and Medicare taxes)
- Contributions you made to retirement accounts. Contributions include SEP, SIMPLE, 401(k) and other qualified retirement plans (if you’re self-employed)
- The amount you paid for health insurance during the year. This number is limited to your net self-employment income.
- Any penalty you paid on the early withdrawal of your money from a savings account
- Alimony paid
- IRA deduction
- Student loan interest
- Tuition and fees
- Domestic production activities deduction (a deduction for manufacturing, construction, engineering, and software businesses)
Self-employed workers can take advantage of above-the-line deductions. If you increase these deductions, you can lower your taxes.
Example of how to calculate AGI
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:
- Self-employed health insurance premiums: $13,000
- 50% of self-employment taxes: $15,300
- Student loan interest: $450
- IRA contributions: $6,500
Your adjustments total $35,250. Subtract the adjusted total from $120,000 and your AGI is $84,750.
How to increase your deductions
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.
