What is Adjusted Gross Income (AGI)?

Adjusted gross income (AGI) is a term used in the United States tax system to describe a taxpayer’s income after certain adjustments have been made. These adjustments can include things like contributions to retirement accounts, student loan interest, and alimony payments. AGI is used to calculate taxable income, which is the amount of income that is subject to federal income tax.

How is AGI calculated?

AGI is calculated by subtracting certain adjustments from gross income. Gross income includes all of a taxpayer’s income from all sources, such as wages, salaries, self-employment income, dividends, interest, and capital gains.

The following are some of the adjustments that can be made to gross income to calculate AGI:

• Contributions to retirement accounts, such as 401(k)s, IRAs, and HSAs
• Student loan interest
• Alimony payments
• Moving expenses
• Health insurance premiums paid by self-employed individuals
• Educator expenses
• Certain business expenses

What is the difference between AGI and taxable income?

AGI is used to calculate taxable income, but it is not the same thing as taxable income. Taxable income is calculated by subtracting allowances for personal exemptions and itemized deductions from AGI.

Personal exemptions are deductions that are allowed for each taxpayer and dependent. Itemized deductions are deductions that taxpayers can claim for certain expenses, such as medical expenses, charitable contributions, and mortgage interest.

Why is AGI important?

AGI is important for a number of reasons. It is used to determine a taxpayer’s eligibility for certain tax credits and deductions. For example, the Earned Income Tax Credit (EITC) is a refundable tax credit that is available to low- and moderate-income workers. The amount of the EITC that a taxpayer can claim is based on their AGI.

AGI is also used to determine a taxpayer’s marginal tax rate. The marginal tax rate is the rate that is applied to the last dollar of income that a taxpayer earns. A taxpayer’s marginal tax rate can affect their decision-making about how to save money, invest their money, and take on debt.

How can I lower my AGI?

There are a number of things that taxpayers can do to lower their AGI. Some of these things include:

• Making contributions to retirement accounts
• Paying student loan interest
• Making alimony payments
• Moving expenses
• Health insurance premiums paid by self-employed individuals
• Educator expenses
• Certain business expenses

Taxpayers should consult with a tax professional to determine the best way to lower their AGI and maximize their tax savings.