What is Adjusted Gross Income (AGI)? How To Calculate It

What is Adjusted Gross Income?

In the United States income tax system, adjusted gross income (AGI) is an individual’s total gross income excluding specific deductions. It is used to specify taxable income, which is AGI minus allowances for personal utilization and itemized reductions. For many individual tax purposes, AGI is more desirable than gross income.

When preparing the tax return, most people probably pay a lot of attention to their taxable income than their adjusted gross income (AGI). However, AGI is also worthy of getting attention, since it can directly impact the deductions and credits,

Gross income is nothing but the sales price of goods or property, excluding the cost of the property sold, plus other income. It includes money that comes from wages, interest, dividends, business income, rental income, and many other types of income.

Understanding Adjusted Gross Income

AGI is an upgraded version of gross income in the United States tax code. AGI factors in several permittable deductions from your gross income to reach the number on which your income tax liability will be calculated.

AGI is generally more helpful than gross income for individual tax stuff. The deductions that upgrade gross income into adjusted gross income are all above the line, which means that they are noted before tax exemptions for military service, dependent status, etc.

Above-the-line deductions are also taken into account before itemized deductions taken by a tax bearer on Schedule 1 and standard reductions.

In most of the U.S. base, a holder’s total tax bill, the calculation starts with adjusted gross income. From there, state-specific deductions and credits are factored in to calculate an individual’s state taxable income.

How To Calculate Adjusted Gross Income

The following two equations sum up how income is added to your tax return. You start with your gross income and after some changes and modifications, you get your adjusted gross income. The next step is to subtract exemptions and deductions to get your taxable income.

Adjusted Gross Income (AGI) = Gross income – Adjustments

Taxable Income = Adjusted Gross Income (AGI) – Exemptions – Deductions

Your gross income shows all the income you received over the time of a year before anything is subtracted from your gross income and before it is adjusted in any way.

It includes almost all income from a wide variety of income sources, such as salary, bonuses, interest, rental property income, severance pay, alimony payments received, gambling winnings, and so on. Even a canceled debt you once asked for is usually considered income to you.

Although, there are exceptions such as child support payments, life insurance proceeds, the money you borrowed, qualified scholarships, and gifts and inheritances.

Possible Deductions When Calculating AGI

As per the 2019 tax year, which people are intended to file in early 2020, these are the main deductions they can make to find their AGI:

  1. Individual retirement account (IRA) contributions
  2. Health savings account (HSA) contributions
  3. SEP-IRA and SIMPLE IRA plan contributions
  4. Self-employed health insurance premiums
  5. Half of the self-employment tax
  6. Alimony payments
  7. Student loan interest payments
  8. Moving expenses for members of the armed forces
  9. Education expenses
  10. Penalties on early withdrawal from CDs and other savings accounts

There were more additional above-the-line deductions before the earlier tax year, but some of them were eliminated and few were changed during the tax reform in the year before that. If you believe you can claim a deduction that wasn’t mentioned above, make sure to check it again from the instructions on the latest Form 1040.

What is Modified Adjusted Gross Income?

Modified adjusted gross income or MAGI is your adjusted gross income but with few more factors added to your equation. IRS uses your MAGI for determining your eligibility for several credits, deductions, and retirement plans.

The formula for modified adjusted gross income will depend on what type of tax benefit you are looking for because there is no exact formula set for calculating Modified adjusted gross income or MAGI though one factor remains the same while calculating MAGI which is adjusted gross income or AGI.


According to the IRS Adjusted Gross Income is defined as gross income minus adjustments to income. You can get a quick estimate of your AGI by looking at line 7 on Form 1040.5  If you are married filing jointly, the $69,000 AGI limitation to be allowed to use IRS free file applies to both you and your spouse combined.

11 To e-file a federal tax return, you must verify your identity for the IRS, either with your AGI from last year’s return or a self-selected personal identification number (PIN). The IRS has stopped issuing new PINs due to cyber-attacks, but you can still use yours if you selected it in a previous year.

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