# Understanding Adjusted Gross Income (AGI) and How It Impacts Your Taxes

## What Is Adjusted Gross Income (AGI)?

Adjusted gross income (AGI) is the number that the Internal Revenue Service (IRS) uses to determine your income taxes owed for the year. It represents your total taxable income after specific adjustments, influencing not only how much tax you owe but also your eligibility for certain tax deductions and credits. Understanding your AGI can help maximize your returns and ensure compliance with tax laws.  

### Key Takeaways

*   Adjusted Gross Income (AGI) is calculated by subtracting specific adjustments from your total annual income to determine tax obligations.
*   AGI influences eligibility for various tax deductions and credits, affecting your overall tax liability.
*   Modified AGI (MAGI) includes certain add-backs to AGI and can impact eligibility for some government programs and retirement contributions.
*   Many states use federal AGI to calculate state taxes, which may be adjusted with specific state deductions and credits.
*   Common AGI adjustments include student loan interest, educator expenses, and self-employment tax deductions.

![Adjusted Gross Income (AGI)](https://www.investopedia.com/thmb/wBi9wypuqAMz5aHv7Ju6V_zXycY=/1080x0/filters:no_upscale():max_bytes(150000):strip_icc()/AGI-FINAL-6a232c512a9d4606a0c8a29fa57dbb59.png)

*— Investopedia / Jiaqi Zhou*

## Breaking Down Adjusted Gross Income (AGI)

Gross income is all the money you earn in a year, like wages, [dividends](https://www.investopedia.com/terms/d/dividend.asp), [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp), interest, and rental income, before taxes or 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 use AGI from federal returns to decide [state income taxes](https://www.investopedia.com/ask/answers/060515/what-difference-between-state-income-tax-and-federal-income-tax.asp), often adjusting it with state-specific deductions and [credits](https://www.investopedia.com/terms/t/taxcredit.asp).

> **Important**
>
> AGI is an important figure because it determines your eligibility for certain deductions and tax credits.

## Typical Adjustments That Affect AGI

Adjustments to income are subtracted from your gross income to find your AGI, reported on Schedule 1 of your [tax return.](https://www.investopedia.com/terms/t/taxreturn.asp) 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](https://www.investopedia.com/terms/h/hsa.asp) (HSA) deductions (Form 8889)
*   Moving expenses for members of the armed forces (Form 3903)
*   Some IRA contributions (Schedule 1)
*   Self-employed [Simplified Employee Pension](https://www.investopedia.com/terms/s/sep.asp) (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and [qualified plans](https://www.investopedia.com/terms/q/qrp.asp)
*   Self-employed health insurance deduction
*   [Self-employment tax](https://www.investopedia.com/terms/s/selfemploymenttax.asp) (the deductible portion)
*   Student loan interest deduction

## Calculating Your Adjusted Gross Income: A Guide

Tax software calculates your AGI from your income. If you do it manually, add up all your income, such as job earnings on a [W-2 form](https://www.investopedia.com/terms/w/w2form.asp), as well as other sources like dividends and self-employment income from [1099 forms](https://www.investopedia.com/articles/personal-finance/082514/purpose-1099-forms.asp).

Then, add taxable income from other sources, such as profits from property sales, unemployment benefits, pensions, Social Security benefits, and IRA contributions. Many of these items are also listed on IRS Schedule 1.

### Subtract Your Adjustments

Subtract your applicable adjustments to get your AGI.

To find your taxable income, subtract your [standard](https://www.investopedia.com/terms/s/standarddeduction.asp) or [itemized deductions](https://www.investopedia.com/terms/i/itemizeddeduction.asp) from your AGI.

The standard deduction for tax returns for [married couples filing jointly](https://www.investopedia.com/terms/m/mfj.asp) is $29,200 for the 2024 tax year or $14,600 for single filers. Taxpayers whose itemized deductions exceed that amount would generally opt to itemize, while others would take the standard deduction.

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.

## Example: When AGI Impacts Your Deductions

Let's say you had some significant dental expenses during the year that weren't reimbursed by [insurance](https://www.investopedia.com/terms/i/insurance.asp), 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, or $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, $8,250 in this case.

## Comparing AGI and MAGI: What You Need to Know

Some tax calculations and government programs are based on 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](https://www.investopedia.com/terms/r/rothira.asp) (Roth IRA) in any given year. Pre-tax contributions to traditional 401(k) funds help to [reduce your AGI and MAGI](https://www.investopedia.com/ask/answers/111815/do-401k-contributions-reduce-agi-andor-magi.asp) 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](https://www.investopedia.com/terms/a/affordable-care-act.asp) (ACA).

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

> **Fast Fact**
>
> If you file electronically, the IRS form will ask you for your previous year’s AGI as a way of verifying your identity.

## Distinguishing AGI, Gross Income, and 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 is that amount minus certain qualified expenses and adjustments.

You then subtract either the standard deduction or the total of your itemized deductions for the year. You can't take both itemized deductions and the standard deduction.

The result is your [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp).

### Locating Your Adjusted Gross Income on Tax Forms

You report your AGI on line 11 of IRS [Form 1040](https://www.investopedia.com/terms/1/1040.asp), the form you use to file your income taxes for the year.

Keep that number handy after completing your taxes because you'll need it again if you e-file your taxes next year. The IRS uses it as a way to verify your identity.

## What Does Adjusted Gross Income (AGI) Mean on My Tax Return?

Adjusted gross income (AGI) is your taxable income for the year after accounting for all applicable tax deductions. It's an important number that's used by the IRS to determine how much you owe in taxes.

AGI is calculated by taking your gross income from the year and subtracting any deductions that you're eligible to claim. Your AGI will always be less than or equal to your gross income.

## What Are Some Common Adjustments Used When Determining AGI?

Most are tax breaks that reduce your taxable income. One big one is an adjustment for student loan interest. Others are more specialized, such as an adjustment for moving expenses incurred by military personnel and an adjustment for teachers who buy classroom supplies.

You may qualify for none of these adjustments, in which case your adjustable gross income will be identical to your gross income.

## What Is the Difference Between AGI and Modified Adjusted Gross Income (MAGI)?

AGI and modified adjusted gross income (MAGI) are very similar except that MAGI adds back certain deductions. MAGI will always be larger than or equal to AGI for this reason.

Common examples of deductions that are added back to calculate MAGI include foreign earned income, income earned on [U.S. savings bonds](https://www.investopedia.com/terms/u/ussavingsbonds.asp), and losses arising from a publicly traded [partnership](https://www.investopedia.com/terms/p/partnership.asp).

## The Bottom Line

Your Adjusted Gross Income (AGI) plays a crucial role in determining your taxable income and eligibility for various deductions and tax credits. Begin with your gross income, then subtract qualified adjustments to arrive at your AGI. These adjustments can include student loan interest and contributions to retirement accounts, which provide significant tax advantages. AGI affects both your federal and state taxes and can impact your eligibility for additional deductions and credits. Remember, your AGI can influence how much you owe or receive as a refund, so understanding how to calculate it properly is essential for optimized tax filing.  

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Definition of Adjusted Gross Income](https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income).”
>     
> 2.  Internal Revenue Service. “[Schedule 1: Additional Income and Adjustments to Income](https://www.irs.gov/pub/irs-pdf/f1040s1.pdf).”
>     
> 3.  Internal Revenue Service. “[Form 1040: U.S. Individual Income Tax Return](https://www.irs.gov/pub/irs-pdf/f1040.pdf).”
>     
> 4.  Internal Revenue Service. “[Topic No. 501 Should I Itemize?](https://www.irs.gov/taxtopics/tc501)”
>     
> 5.  Internal Revenue Service. "[Publication 505 (2024), Tax Withholding and Estimated Tax](https://www.irs.gov/publications/p505#:~:text=For%202024%2C%20the%20standard%20deduction,Head%20of%20Household%E2%80%94%2421%2C900.)."
>     
> 6.  Internal Revenue Service. “[Topic No. 502 Medical and Dental Expenses](https://www.irs.gov/taxtopics/tc502).”
>     
> 7.  HealthCare.gov. “[How to Count Income & Household Members: What to Include as Income](https://www.healthcare.gov/income-and-household-information/income/#).”
>     
> 8.  HealthCare.gov. “[Modified Adjusted Gross Income (MAGI)](https://www.healthcare.gov/glossary/modified-adjusted-gross-income-magi/).”
>     
> 9.  Internal Revenue Service. “[Validating Your Electronically Filed Tax Return](https://www.irs.gov/individuals/electronic-filing-pin-request).”
>     
> 10.  Internal Revenue Service. “[Schedule 1: Additional Income and Adjustments to Income](https://www.irs.gov/pub/irs-pdf/f1040s1.pdf).”