What Is Adjusted Gross Income (AGI)?

What Is Adjusted Gross Income (AGI)?

Adjusted gross income (AGI) is the figure that the Internal Revenue Service (IRS) uses to determine your income tax liability for the year. It's calculated by subtracting certain adjustments from gross income, such as business expenses, student loan interest payments, and contributions to retirement accounts. After calculating a taxpayer’s gross or overall income, the next step is to subtract any of these deductions they're eligible to claim to determine their adjusted gross income.

The IRS also uses other income metrics, such as modified AGI (MAGI), to determine eligibility for specific programs and retirement accounts.

Understanding Adjusted Gross Income (AGI)

AGI is a modification of gross income that's provided for in the United States tax code. Gross income is the sum of all the money you earn in a year, which may include wages, dividends, capital gains, interest income, royalties, rental income, and retirement distributions, before tax or other deductions. AGI makes certain adjustments to your gross income to reach the figure on which your tax liability will be calculated.

Many U.S. states also use the AGI from federal returns to calculate how much individuals owe in state income taxes. States may modify this number further with state-specific deductions and credits.

Common Adjustments

The items subtracted from your gross income to calculate your AGI are referred to as adjustments to income and you report them on Schedule 1 when you file your annual tax return. Some of the most common adjustments include:

• Early withdrawal penalties on savings
• Educator expenses
• Employee business expenses for armed forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses (Form 2106)
• Health Savings Account (HSA) deductions (Form 8889)
• Moving expenses for members of the armed forces (Form 3903)
• Some IRA contributions (Schedule 1)
• Self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
• Self-employed health insurance deduction
• Self-employment tax (the deductible portion)
• Student loan interest deduction

How to Calculate Adjusted Gross Income

If you use software to prepare your tax return, it will calculate your AGI after you've input your numbers. If you calculate it yourself, you’ll begin by tallying your total reported income for the year. That might include job income, as reported to the IRS by your employer on a W-2 form, plus other income, such as dividends, self-employment income, and miscellaneous income, reported on 1099 forms.

Next add any taxable income from other sources, such as profit on the sale of a property, unemployment compensation, pensions, Social Security payments, IRA contributions, or anything else that hasn’t already been reported to the IRS. Many of these income items are also listed on IRS Schedule 1.

The next step is to subtract the applicable adjustments to the income listed above from your reported income. The resulting figure is your AGI. To determine your taxable income, subtract either the standard deduction or your total itemized deductions from your AGI to determine your taxable income.

The standard deduction for tax returns for married couples filing jointly was $25,900 in 2022, increasing to $27,700 in 2023. Couples whose itemized deductions exceed that amount would generally opt to itemize, while others would take the standard deduction because it amounts to more.

The IRS provides a list of itemized deductions and the requirements for claiming them on its website. Your AGI also affects your eligibility for many of these deductions and tax credits. The lower your AGI, the more significant the number of deductions and credits you'll generally be eligible to claim, and the more you’ll be able to reduce your tax bill.

An Example of AGI Affecting Deductions

Let’s say you had some significant dental expenses during the year that weren’t reimbursed by insurance and you’ve decided to itemize your deductions. You're allowed to claim an itemized deduction for the portion of those expenses that exceed 7.5% of your AGI.

This means that you can deduct the amount that exceeds $7,500, which is $4,500, if you report $12,000 in unreimbursed dental expenses and have an AGI of $100,000. But the 7.5% reduction is just $3,750 if your AGI is $50,000, and you’d be entitled to deduct a larger amount of that $12,000 or $8,250 in this case.

Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)

Some tax calculations and government programs call for using what’s known as your modified adjusted gross income or MAGI. This figure starts with your AGI, then it adds back certain items, such as any deductions you take for student loan interest or tuition and fees.

Your MAGI determines how much, if anything, you can contribute to a Roth individual retirement account (Roth IRA) in any given year. Pre-tax contributions to traditional 401(k) funds help to reduce your AGI and MAGI taxable income. Roth IRA contributions are made with after-tax dollars and won't further reduce your AGI or MAGI.

It's also used to calculate your income if you apply for Marketplace health insurance under the Affordable Care Act (ACA).

Many people with relatively uncomplicated financial lives find that their AGI and MAGI are the same or very close.

Adjusted Gross Income vs. Gross Income vs. Taxable Income

Your gross income is all the money you've earned in a year that isn't exempt from taxation. This income can be in the form of salary, wages, self-employment income, interest, dividends, or capital gains.

Your adjusted gross income takes that amount and subtracts certain qualified expenses and adjustments.

Taxpayers can then take either the standard deduction for their filing status or itemize the deductible expenses they paid during the year. You're not permitted to both itemize deductions and claim the standard deduction. The result is your taxable income.

The Bottom Line

Adjusted gross income or AGI is your gross income after it's been adjusted for certain qualified deductions that are permitted by the IRS. These qualified deductions can reduce an individual's gross income, thus reducing the taxable income that they'll ultimately have to pay taxes on. You can save money come tax season by lowering your AGI, which will in turn lower your taxable income. However, many of the adjustments allowed for AGI are specific for particular circumstances that may not apply to everyone.

Correction—Nov. 8, 2023: A previous version of this article omitted the IRA deduction as one of the common adjustments to calculate AGI.