What is Adjusted Gross Income (AGI)?

Published by Thomas Herold in Accounting, Laws & Regulations

'Adjusted Gross Income (AGI)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Adjusted Gross Income (AGI) refers to a means of calculating income off of an individual’s actual gross income. People use this figure in order to determine the amount of their income which the Internal Revenue Service will subject to tax assessment. It is ultimately the United States tax code which creates this AGI figure. This number should never be confused with the actual gross income. Gross income is merely the total amount of all money individuals realize and earn over a year long period.

The Adjusted Gross Income considers a range of deductions which it subtracts from the individuals in question’s actual gross incomes. The result is the basis off of which the person’s individual income taxes become calculated at the end of the tax year. Where tax activities and the Internal Revenue Service are concerned, this figure generally proves to be more useful than gross income alone.

All relevant deductions that apply to gross income and turn it into Adjusted Gross Income come from above the line deductions. This simply signifies that they must be reflected on the tax calculations ahead of dependents, military service, and other exemptions. There are a number of such deductions which count in the compiling of this AGI. Among the best known and most common are the following: contributions to retirement plans, business expenses which are not reimbursed, medical expenses, losses from property sales, and alimony or child support.

To calculate up individuals’ Adjusted Gross Income, it is first necessary to figure up all reported income in the year being considered. Additional taxable income sources also have to be added in to the total. This includes any compensation for unemployment, property sales’ profits, Social Security payments, pensions, and other sources of income that did not become reported on the tax return. Once this complete earnings’ total has been figured up, it is necessary to subtract out all relevant deductions to come up with the appropriate AGI.

The Internal Revenue Service makes it easier to come up with all of the potential deductions pertaining to gross income by going to their IRS website. Here they provide a rules list for all potential deductions’ requirements. Some of these prove to be extremely specific. This is why people have to carefully study the tax code in order to be certain of their eligibility for any and all deductions that they take.

Once individuals have figured out their AGI, they are able to then add in the government’s normal federal tax deductions to finish calculating their taxable income. For some tax payers, this will mean itemizing out their various expenses to come up with the itemized deductions alternatively. Sometimes this works out better for taxpayers. One thing that a tax payer must be careful to never do is to not confuse their Adjusted Gross Income with their MAGI modified adjusted gross income.

In fact the modified adjusted gross income is supposed to be totally separate from the AGI. It is utilized to figure out the deductible dollar amount from the person’s IRA individual retirement account. It will also be employed to decide if the private parties are eligible for specific tax deductions. In order to figure up this MAGI, tax payers have to add back in some items like foreign housing deductions, foreign earned income, IRA contribution deductions, higher education cost deductions, and student loan deductions.

In many cases, the MAGI is often much the same as the AGI for a given individual. Yet it is important to be aware that even tiny differences can significantly impact the overall tax return for an individual. In particular, such variances will impact a person’s eligibility to receive particular benefits allowed under the ACA Affordable Care Act.

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The term 'Adjusted Gross Income (AGI)' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.