The information in this article is up to date for tax year 2023 (returns filed in 2024).
Adjusted gross income (AGI) impacts your eligibility for specific deductions, credits, and programs, and helps determine your overall tax liability. Here’s a quick breakdown of what AGI is, how it affects your taxable income, and how to calculate it for the coming tax season.
Key Takeaways:
- The IRS uses AGI to determine your taxable income.
- AGI is calculated by subtracting above-the-line deductions and qualified expenses from your gross earnings for the year.
- Your AGI is calculated on Schedule 1 and documented on line 11 of IRS Form 1040.
What Is Adjusted Gross Income?
AGI is your gross income minus qualified adjustments.
When filing your taxes, you will calculate your AGI by subtracting eligible expenses and any above-the-line deductions you may qualify for on your IRS Form 1040, Schedule 1. You then use your AGI to calculate your taxable income by applying either the standard deduction or itemized deductions.
So what does that mean, exactly? Let’s review some key terms:
Gross income: Gross income is your earnings before taxes or other deductions. This includes not only your wages but also other earnings like dividends, business income, retirement distributions, capital gains, as well as other income. Your AGI will never exceed your gross income.
Above-the-line deductions: Above-the-line deductions are separate from the standard or itemized deductions found on Form 1040. They are subtracted from your gross income to determine your AGI. Above-the-line deductions include things like retirement contributions, business expenses, and student loan interest.
Adjustments: Adjustments are money you spent during the year that the federal government allows you to exclude from your taxable income. Some adjustments are above-the-line deductions (e.g., student loan interest), and some are qualified expenses (e.g., alimony payments).
Taxable income: Taxable income is the portion of your gross income used to calculate your tax liability for the year. In other words, it is the amount of income subject to tax after any qualifying deductions. Taxable income is based on your AGI. Determine your taxable income by subtracting the standard or itemized deduction from your AGI. (You cannot apply both—you must pick either the standard or itemized deduction).
Taxable income = AGI – standard OR itemized deduction.
Why Does AGI Matter?
AGI is important for determining your taxable income, of course. But it is also important because it can impact the deductions and credits you are eligible for. Typically, the lower your AGI, the bigger the credits or deductions you can claim—and the lower your tax bill.
Most states will also use your AGI to determine what you owe in state taxes.
How to Calculate AGI?
To calculate your AGI, you will need to fill out the Adjustments to Income section of Form 1040, Schedule 1.
The first page reports Additional Income you may have earned outside of your W-2 income, such as alimony payments, unemployment benefits, farm income, business income (or loss), awards or prizes, rental income, etc.
The second page is where you report any Adjustments to Income. These include things like educator expenses, IRA contributions, etc.
For example, during the tax year, did you or your spouse:
- Pay qualified educator expenses (up to $300)?
- Receive income from self-employment?
- Have self-employed health insurance?
- Pay a penalty for early withdrawal of savings?
- Pay alimony?
- Make contributions to a traditional IRA?
- Make a contribution to a health savings account?
- Pay student loan interest?
- Receive income from jury duty that was turned over to an employer?
If the answer is yes, you can add these expenses to your Adjustments sheet.
Your AGI will be your gross income total minus any adjustments (e.g., eligible expenses and deductions).
Where to Find Your Adjusted Gross Income
Many people ask how to find their adjusted gross income on W-2 forms. However, AGI is not listed there. Instead, your Form W-2 will list your total earnings from your employer for the year, as well as the amount of taxes withheld. You will need this information to calculate your AGI, which will appear on Line 11 of your IRS Form 1040 on your tax return.
Pro Tip: If you file your taxes electronically, you will need to validate your return with your signature and prior-year AGI or prior-year Self-Select PIN. You can find your prior-year AGI on a copy of your last tax return. ezTaxReturn makes this easy by pre-populating the field for return customers. If you’re a new customer, you will need to input the info manually.
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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
