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Adjusted gross income is simply all the money you made for a year minus special adjustments the IRS allows to help lower taxes.By Megan Doyle | American Express Credit Intel Freelance Contributor 7 Min Read | February 1, 2022 in Money At-A-GlanceYour adjusted gross income plays a key role in determining how much taxes you’ll owe. It’s calculated by subtracting certain tax adjustments from your gross income. The lower your adjusted gross income, the more likely you’ll qualify for certain tax breaks.
What Is Adjusted Gross Income (AGI)?AGI is defined as your gross income minus whichever tax adjustments you qualify for (AGI = gross income - any eligible tax adjustments). When filing your taxes, your AGI is used to determine your taxable income. Let’s break that down piece by piece:
How Your AGI Is UsedThere are several important ways your AGI is used:
Understanding AGI Can Help You Save Money on TaxesWhen it comes to below-the-line deductions, you might be aware that you can lower your taxable income – and therefore, the taxes you owe – by taking the standard deduction or itemizing your deductions, depending on your specific tax circumstances. But you may also be able to lower your tax bill thanks to the above-the-line tax adjustments used to calculate your AGI. There are at least 10 above-the-line AGI adjustments, but most people only qualify for a few.2 Some of the more common adjustments taxpayers use to lower their AGI include:
In general, the lower your AGI, the greater the chance you’ll qualify for tax credits and certain itemized deductions. It’s important to note that requirements for many below-the-line adjustments, tax credits, and itemized deductions can be very specific and are subject to income thresholds. This means that tax benefits might be reduced or limited if your AGI or MAGI (depending on the tax benefit) is above a certain level. When it comes to the medical and dental expense deduction, for example, the IRS will let you deduct a portion of qualifying medical expenses that exceed 7.5% of your AGI. So if your AGI is $50,000, you can only deduct medical expenses that exceed $3,750. This means that if you have $6,000 in medical expenses, $2,250 would be deductible.3 Requirements are also subject to change each year, so be on the lookout for new laws before filing your taxes. How to Calculate Your AGIMost tax software will calculate your AGI for you, and the IRS suggests taxpayers consider filing electronically because it’s fast and accurate.4 But it’s usually better to understand what it’s doing. For the 2021 tax year, here’s what you’ll need:
To calculate your AGI, refer to the accompanying excerpt of Form 1040 for the 2021 tax year (below) and follow these instructions:
Your AGI will never be more than your total income, and it’s not uncommon for your AGI and total income to be the same. Take note: When filling out your 1040, some types of additional income and adjustments to income require that you fill out and attach additional forms and schedules. These help you correctly calculate income and adjustments. For more information, see the IRS instructions for Form 1040. The TakeawayYour adjusted gross income is your gross income minus certain above-the-line tax adjustments. These adjustments effectively lower your taxable income and increase your chances of qualifying for certain tax breaks. If you’re eligible, taking advantage of above-the-line tax adjustments can help you save money by lowering your tax bill. Megan Doyle is a business technology writer and researcher whose work focuses on financial services and cross-cultural diversity and inclusion. All Credit
Intel content is written by freelance authors and commissioned and paid for by American Express.
What Is Gross Income? Understanding the definition of gross income can be important because gross income is the starting point for calculating many other types of income. Tell me more The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors. Where can I find the gross income on 1040?Your total (or “gross”) income for the tax year, minus certain adjustments you're allowed to take. Adjustments include deductions for conventional IRA contributions, student loan interest, and more. Adjusted gross income appears on IRS Form 1040, line 11.
Where can I find my gross annual income?Your gross income can be found on a pay stub as the total amount of money you earned in a given period before any deductions or taxes are removed. You can also see your total gross income on your year-end W2 or 1099.
Where do I find annual revenue on my tax return?Whether you use accrual or cash-basis accounting, you can typically find your revenue on the first line of your small business income statement. The income statement is also known as the profit and loss (P&L) statement.
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