During tax season, you may want to pay more attention to your taxable income rather than your adjusted gross income (AGI). However, your AGI directly impacts the deductions and credits you’re eligible for—which can reduce the amount of taxable income you have on your tax return. What is AGI and how does it affect you?
What is Adjusted Gross Income (AGI)?
Adjusted gross income is a modification of total income in the United States tax code. Gross income is the sum of everything you earned during the year, or your taxable income. AGI plays a huge part during tax season because it can decrease the amount you owe from your taxable income. Adjusted gross income factors all the deductions you earned throughout the year from your gross income to reach a figure for which an individual’s income taxes will be calculated.
Some of the most popular deductions include medical expenses, retirement plan contributions, losses incurred from the sale or exchange of property, unreimbursed business expenses, and alimony. You can allow your tax preparer to calculate your AGI, or you can do it yourself.
How Do I Calculate My AGI?
You can allow your tax preparer to calculate your adjusted gross income, or you can do it yourself. But it’s always best to double check it yourself—whether a tax professional did it for you or not.
If you want to do it on your own, the first thing you need to do is gather all of your income statements including your W-2, self-employment income, or any other types of income you received throughout the year. You also need to add other taxable income such as taxable refunds, alimony, farm income, Social Security benefits, and anything else that provided taxable income. The sum of All of these amounts is your “total income.”
Once you know your total income, you can begin to subtract your deductions and expenses. You need to be careful what you deduct because federal and state laws only allow certain things to be deducted. Some of the most common include moving expenses, health savings account deductions, tuition and fees, student loan interest, alimony, and more. You can find a list of the most popular tax deductions here.
After you’ve discovered your deductions and expenses, you can subtract the amount from your total income. This number is your adjusted gross income.
Is There an Adjusted Gross Income Calculator?
It can be difficult to do all these calculations yourself, but thankfully some applications allow you to find out your adjusted gross income without downloading anything sketchy. CNN Money has a useful adjusted gross income calculator that lets you type in your wages, capital gains, and any other total income you earned through the year. Then you type in any deductions you had (like moving expenses, IRA contributions, and more). Then you click “calculate AGI, ” and the calculator does all the hard work for you.
After you discover your AGI, it’s important to bring it to your tax preparer to cross check calculations between both parties. It’s possible that you missed deductions that are applicable or that the tax professional missed expenses.