The information in this article is up to date for tax year 2024 (returns filed in 2025).
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 refers to 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. Retirement income, along with other sources, is included in the broad calculation of a person’s total income for tax purposes, influencing the overall tax liability.
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. Retirement plan contributions can also impact the eligibility for contributions to specific retirement accounts, such as Roth IRAs.
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 self employment income?
- Have self-employed health insurance?
- Pay self employment tax?
- 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, including certain business expenses).
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.
Modified Adjusted Gross Income (MAGI)
Modified Adjusted Gross Income (MAGI) is a variation of Adjusted Gross Income (AGI) that plays a crucial role in determining your eligibility for certain tax credits and deductions. While AGI is your gross income minus qualified adjustments, MAGI takes it a step further by adding back specific deductions and tax-exempt income.
To calculate your MAGI, start with your AGI and add back the following:
- Non-taxable Social Security benefits
- Untaxed foreign income
- Tax-exempt interest
- Certain deductions and tax penalties
Understanding MAGI is essential because it affects your eligibility for various tax benefits. For instance, the Child Tax Credit is based on your MAGI, and the credit amount phases out as your MAGI increases. Other tax credits and deductions, such as the premium tax credit and foreign earned income exclusion, also rely on your MAGI.
By knowing how to calculate your MAGI, you can better plan your finances and maximize your tax benefits. Remember, your adjusted gross income (AGI) is just the starting point; understanding your modified adjusted gross income (MAGI) can unlock additional tax savings.
Common Mistakes to Avoid
When calculating your AGI, it’s easy to make mistakes that can cost you money or lead to issues with the IRS. Here are some common pitfalls to watch out for:
- Forgetting to include all sources of income: Make sure to account for all income, including interest from savings accounts and capital gains from investments.
- Failing to subtract all eligible deductions: Don’t overlook deductions like student loan interest or retirement account contributions, which can significantly reduce your AGI.
- Miscalculating business expenses: If you’re self-employed, ensure you accurately track and deduct all business expenses. Inaccurate records can lead to missed deductions.
- Confusing AGI with MAGI: Understand the difference between AGI and MAGI, as this can affect your eligibility for various tax credits and deductions.
To avoid these mistakes, consider using reliable tax software like ezTaxReturn. Keeping accurate records and staying organized throughout the year can also help ensure that your AGI is calculated correctly and that you take advantage of all eligible deductions.
By being mindful of these common errors, you can optimize your tax return and potentially save a significant amount of money.
Get the Biggest Refund with ezTaxReturn
Calculating your AGI and other tax figures can feel overwhelming—and it can be easy to miss deductions and adjustments you may qualify for. Let do the heavy lifting for you. We’ll walk you through the filing process to make sure you get the biggest possible return. Simply create an account, answer some questions, and let ezTaxReturn do the rest. We’ll handle all the math and tax forms for you.
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.
