What is Adjusted Gross Income?

What is Adjusted Gross Income?

Adjusted Gross Income (AGI) is the amount where the income tax liability or the amount of income tax you owe is based on. It is evaluated by the Internal Revenue Service (IRS). Simply put, AGI is determined by taking away some “Adjustments to Income” from your annual gross income or income for the whole year.

What is the Importance of AGI? What are its Implications?

The term “Adjusted Gross Income (AGI)” is common when talking about Taxes. AGI is the first step towards determining your taxable income and where you will know what credits and deductions you are eligible for. From AGI, certain adjustments shall be made; then various allowable deductions shall be taken away to come up with how much tax you are obliged to pay. The rule is, the lower your adjusted gross income (AGI) is, the higher the deduction.

How to Calculate Adjusted Gross Income (AGI)?

To calculate your AGI, follow these steps:

1. Tally your gross income. This includes job income on a W-2 form, and other income found on1099 forms.
2. Other sources of taxable income such as pensions and sales shall then be added. This includes all that the IRS has not yet taken note of. You can also find a list of qualified income items on IRS Schedule 1.
3. Take away all certain adjustments to income from the income you have calculated in the previous step, and you get your adjusted gross income (AGI).

If you also want to know your taxable income, take away the total itemized deductions or standard deductions from your AGI. The one that wherein you would most benefit from shall be chosen as a deduction.