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Adjusted gross income (AGI) is a term that you may come across when filing your tax returns. It is the amount you get after making certain adjustments to your gross income.
Apart from filing taxes, your AGI is also used by banks, private companies, and the government to determine whether you are eligible for a certain application, benefit, or program.
In this guide, we will explain what adjusted gross income is, how it is calculated, and what the difference is between adjusted gross income and modified adjusted gross income. So read on.
What Is Adjusted Gross Income?
Adjusted gross income (AGI) is your gross income minus certain payments, such as alimony, student loan interest, health savings account contributions, retirement contributions, and similar payments.
The IRS uses your AGI to determine how much taxes you owe. You can find out your taxable income from your AGI and also determine which tax credits can help you save some money.
How to Calculate Adjusted Gross Income?
You can calculate your AGI automatically if you are using software to calculate your tax returns. You just need to input your numbers and the software will automatically give you your AGI score.
However, if you are calculating your AGI yourself, you will need to tally the reported annual income.
This includes the job income reported by your employer to the IRS on a W-2 form, as well as any other income you received throughout the year that is reported on 1099 forms. This includes miscellaneous income and dividends.
The next step involves adding taxable income you receive from other sources, such as pensions, profit from a sale of property, Social Security payments, unemployment compensation, and any other income that has not been reported to the IRS.
The final step is to subtract any and all applicable adjustments from your reported income. You will then get your AGI.
To put it simply, you can calculate your AGI by subtracting certain payments from your gross income. Your gross income is the money you earn from your:
- Investments
- Jobs
- Pensions
- Social Security
- Real estate
- Farms
- Businesses
- Unemployment
And the payments you need to deduct from your gross income to calculate AGI include:
- Deductible self-employment taxes
- Educator expenses
- Deductible HSA contributions
- Business expenses
- Moving expenses if you are a military member
- Contributions to retirement plans
- Student loan interest
- Alimony
- Penalties
- Deductible IRA contributions
- Deductible fees and tuition
- Penalties for withdrawing your savings earlier
Adjusted Gross Income vs. Modified Adjusted Gross Income
Some government agencies and tax calculations also require you to use your modified adjusted gross income (MAGI). So what is modified adjusted gross income?
Well, your MAGI is the number you get by adding back certain items to your AGI, such as any deductibles for tuition, fees, or student loan interest.
For example, your MAGI is used to calculate the amount of money you can contribute to a Roth individual retirement account (Roth IRA). You will also need it to calculate your income if you are putting in an application for Marketplace health insurance under the Affordable Care Act (ACA).
Your AGI and MAGI are often very close or even the same amount. However, the formula for calculating MAGI depends on the type of tax benefit you are aiming for.
For instance, you may also need to add back in the deduction for non-taxable Social Security benefits.
What Is the Difference Between Adjusted Gross Income and Gross Income?
Adjusted Gross Income vs. Gross Income
Your gross income is the total income you earn before paying any taxes. This includes the total money you earn from all sources of income before taking out any taxes or deductions, such as income tax, health insurance payments, payroll tax, and other deductibles.
On the other hand, your adjusted gross income is the taxable income you get after all the deductions and adjustments. It is adjusted using qualified deductions as permitted by the IRS. These deductions allow you to reduce the taxes you owe, by reducing your gross income.
Adjusted Gross Income (AGI) for Tax Payments
Adjusted gross income (AGI) is an important number used by the IRS to figure out how much taxes you owe. It is basically the income you are left with after accounting for any and all applicable tax deductions.
When calculating your tax returns, your AGI will often be the starting point. You can then subtract any allowable deductions to find out how much taxes you owe.
The term “adjusted gross income (AGI)” is often repeated on your tax forms. It is used as a basis to determine whether you qualify for any tax credits or deductions. For instance, you could be allowed to deduct any unreimbursed medical expenses in some instances.
Conclusion
Adjusted gross income (AGI) is an important figure that is used when filing your taxes. If you are not totally familiar with what it is, you may end up making calculation errors on your tax return.
With the help of this guide, you can understand what AGI actually is and how it is calculated. As a result, you can calculate how much money you actually take home after all the deductions, as well as prepare monthly budgets.
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