How do you figure out your adjusted gross income

Adjusted gross income is a tax term everyone should understand. Also known as AGI, it has ramifications that extend beyond the tax season.

“People are asking you all the time for your adjusted gross income,” says Paul Joseph, an attorney and CPA with Joseph & Joseph Tax & Payroll in Williamston, Michigan.

Not only does it affect how much you pay in taxes, but it may also be the basis for decisions about eligibility for assistance programs and loans.

Keep reading for everything you need to know how the AGI is calculated and ways to reduce it.

What Is Adjusted Gross Income, or AGI?

The IRS defines adjusted gross income as “gross income minus adjustments to income.” It’s a number that is included on your federal tax form, and many states use it for their own income tax calculations.

“Before you take any deductions or credits, you have your AGI,” explains Edward Renn, a partner on the private client and tax team of international law firm Withers.

Almost all forms of income – except municipal bond interest – are factored into the AGI. There is also a long list of exclusions to the AGI. Those are items that can be deducted to lower a person’s adjusted gross income. Both income and exclusions are spelled out on the Schedule 1 tax form.

Your AGI matters for several reasons:

Taxable income: Your AGI is not the same as your taxable income, but it is the basis for determining that figure. Once your AGI has been calculated, subtract a standard or itemized deduction to get to your taxable amount. The lower your AGI, the lower your taxes will be. When applicable, qualified business income and charitable contributions can be deducted to lower taxable income as well.

Itemized deductions: If you use a Schedule A to itemize your deductions, the AGI will determine how much of certain expenses you can deduct. Specifically, there are the following limitations:

• Only medical and dental expenses exceeding 7.5% of the AGI can deducted.
• Deductions for charitable contributions are generally limited to 60% of the AGI although there may be lower limits in certain instances.
• Only eligible casualty and loss expenses exceeding 10% of the AGI can be deducted.
  

Program eligibility: The AGI is also used to determine eligibility for some tax credits and assistance programs. For instance, the Free Application for Federal Student Aid, known as the FAFSA, asks for the AGI to determine eligibility for educational grants and loans.

The AGI is calculated in the following way:

Wages, salaries, tips + other income = gross income - adjustments to income = AGI

“The changes are generally going to be made on the Schedule 1,” Renn says.

For 2021, there were 25 categories of additional income that must be added when calculating gross income. They include the following, among others:

• Business income.
• Unemployment compensation.
• Gambling income.
• Cancellation of debt.
• Stock options.
  

Then, under adjustments to income, there are two dozen categories that can be excluded, including:

• Educator expenses.
• IRA deduction.
• Student loan interest deduction.
• Moving expenses for members of the armed forces.
• Health savings account deduction.
  

Many tax software programs make it easy to determine which additions and exclusions apply to your income. A professional tax preparer can also ensure you have properly calculated your AGI.

What Are Examples of Adjustments in Taxes?

The adjustments to income included on Schedule 1 mean a dollar-for-dollar reduction in what will ultimately be your taxable income.

“Let’s say you earn a $50,000 salary, and you put $5,000 into a retirement account,” says Brian Copeland, partner and director of financial planning with Hightower Wealth Advisors in St. Louis, Missouri. Assuming the contribution is to a traditional 401(k), IRA or similar account, it would drop a taxpayer’s AGI to $45,000.

After your AGI is calculated, there are several more deductions that can be made before you reach your taxable income. These include the following:

• Standard or itemized deduction.
• Charitable contributions of up to $300 for single taxpayers or $600 for married couples filing jointly, if the standard deduction is claimed.
• Qualified business income deduction.
  

The resulting taxable income is used to determine how much is owed to the government. Taxpayers who are eligible for credits, such as the child tax credit or earned income tax credit, can apply those toward their tax bill to reduce the amount owed.

Find Your Adjusted Gross Income

If you’re looking for a previous year’s AGI, it shouldn’t be difficult to find. You’ll need a copy of your tax return and then look for it on Form 1040. The layout of the form occasionally changes, but for 2021, the AGI can be found on Line 11.

You may also be wondering how to check your withholding to see if your employer is collecting the appropriate tax payments for your AGI. In that case, check a pay stub to see year-to-date totals for tax withholdings and other payroll deductions. If you don’t have a pay stub, contact your company’s human resources department.

“Retirement is the best way to drop it,” Copeland says. Workers can contribute up to $20,500 to a 401(k) account in 2022 or $6,000 to an IRA. Those age 50 and older can make additional catch-up contributions. Within these limits, all contributions made to traditional retirement accounts will reduce a person’s AGI and, as a result, their taxable income.

Retirees have an additional avenue to reduce taxes by making qualified charitable distributions, known as QCDs. At age 72, the government mandates retirees begin taking required minimum distributions from traditional retirement accounts. That money is added to your taxable income, but not if you use it for a QCD. "If you give to charity through a QCD, it reduces income before AGI,” Copeland explains.

QCDs must be sent directly from a retirement fund to the charity to be eligible for the tax benefit so consult with a finance professional if you are unsure about the process.

Other ways to reduce AGI include making contributions to health savings accounts, paying off student loan interest or deducting expenses related to qualified rental properties.

There is little downside to reducing your AGI, and it shouldn’t affect your Social Security benefits, according to Renn. However, some lenders might look at your AGI when considering loan applications.

“It could have impacts on your ability to borrow money,” Joseph says.

However, Renn notes that if lenders see your AGI is low because of large retirement contributions, that may not affect your application’s chances of approval. In that case, they may assume that you could discontinue those contributions to make loan payments, if needed.

What's the Difference Between AGI and Modified Adjusted Gross Income, or MAGI?

While the AGI is important, the modified adjusted gross income may be more important for those applying for assistance through programs such as Medicaid or the government health insurance marketplace.

“Very often, it’s modified AGI that is considered,” Renn says.

Known as MAGI, the modified adjusted gross income is calculated by adding back some deductions to the AGI. For instance, student loan interest and half of the self-employment tax are added to the AGI to determine the MAGI.

“A lot of people have the same number as both,” Copeland says.

That’s because the deductions added back to the AGI to create the MAGI are relatively uncommon. Still, it’s important to know this figure since it affects not only eligibility for some government programs but also whether you’re able to contribute to Roth retirement accounts.

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