Summary: Adjusted Gross Income (AGI) is your total income minus certain adjustments allowed by the IRS. We explain how to calculate AGI here.

Adjusted Gross Income (AGI) is a complicated topic. On the one hand, you want a large adjusted gross income because that means you’re making a lot of money. On the other hand, however, this also means that you’re liable to pay more taxes. 

Ideally, you want your AGI to be as low as possible relative to your income, and that means you should know how to calculate it so you can potentially make changes that will reduce your tax obligations.

What is AGI?

AGI stands for adjusted gross income, which is one total you can find on your tax return. According to the Internal Revenue Service (IRS), AGI is your:

“total (gross) income from all sources minus certain adjustments listed on Schedule 1 of Form 1040.” 

Form 1040 is the well-known U.S. Individual Income Tax Return. Your AGI is the amount you enter on Line 11 of this tax return, and it generally represents how much you earned in the year after some deductions. These are often referred to as “above-the-line” deductions since they are listed on Form 1040 above Line 11, your AGI. Your AGI is calculated before you take your standard or itemized deduction on Form 1040.

You need to calculate your adjusted gross income yourself on your tax return. Your AGI is not found on your W-2 form from your employer because it includes other types of earnings (rental income, interest, dividends, pensions, alimony, etc.) that are unrelated to your employment. 

It also subtracts certain deductions on things like self-employment health insurance contributions, alimony payments, and student loan interest payments. Once you’ve deducted these adjustments, you’re left with your AGI.

Why is AGI Important?

This is the number the IRS uses to determine how much you owe in taxes for the year or your tax liability. In many states, your AGI is also the number the state tax authority uses to decide how much you owe in state taxes as well. Your AGI helps to determine whether you are eligible for some tax credits and deductions.

Aside from your taxes, your AGI can be used for financial and banking activities. Banks often use AGI to decide how much to offer borrowers looking for property or student loans. Landlords may also look at your AGI to decide whether or not to let you rent a house or apartment from them.

How to Calculate AGI

The general way to calculate AGI is by adding up your total gross income from all sources and subtracting certain adjustments. Let’s look at these steps individually:

Step 1: Calculating Total Gross Income

Your total gross income is all the money you’ve made in the year that is taxable. This includes income from the following sources:

  • Employment income (including wages and tips) found on your W-2 form if you’re an employee or your 1099 forms if you’re an independent contractor
  • Taxable tax credits or refunds
  • Foreign income
  • Stock options
  • Prizes and awards
  • Unemployment insurance payments received
  • Dividends
  • Interest
  • Capital gains on investments
  • Pension income
  • Rental income
  • Passthrough income if you’re part of a partnership
  • Self-employment income
  • Taxable Social Security payments received
  • Taxable alimony payments received
  • Digital assets

You’ll find most of these items on the IRS form Schedule 1, Additional Income and Adjustments to Income, as well as on Form 1040 itself. You need to fill in these amounts and then add them together. You’ll add up the totals of your additional income on Line 10 in Schedule 1 and also write this number on Line 8 of Form 1040. Then you add your additional income to your other sources of income (Lines 1-8) to arrive at your total income (total gross income), which you’ll write in Line 9.

Step 2: Calculating Your Adjustments

Before you can calculate your AGI, you need to first add up your adjustments. These are certain fees, expenses, payments, and contributions that you’re allowed to subtract from your total income before being taxed on it. The adjustments you can make include:

  • Penalties for early withdrawal of savings
  • Educator expenses
  • Housing deductions
  • Health Savings Account (HSA) deductions 
  • Moving expenses for armed forces personnel 
  • Some tax-advantaged retirement savings contributions
  • Contributions to self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
  • Self-employed health insurance deduction
  • Deductible part of self-employment tax
  • Student loan interest deductions
  • Tax-advantaged medical savings account (Archer MSA) contributions
  • Jury duty pay
  • Certain attorney costs and court fees

If you have any of these adjustments to make, you can itemize them on Schedule 1 and add them together to arrive at your total adjustments to income on Line 26 of this form. You also write the same number on Line 10 of Form 1040.

Step 3: Calculating Your Adjusted Gross Income (AGI)

The final step you need to perform is simply subtracting your adjustments from your total gross income.

On line Form 1040, subtract Line 10 (total adjustments) from Line 9 (total income) and write the value in Line 11. This is your adjusted gross income for the year.

Example Calculation for AGI

Let’s look at an example of how to calculate AGI on the tax return of Person X:

Income: Keeping things simple, let’s imagine that Person X collects a salary of $80,000/year and also owns a rental property that brings in $21,600 during the year. Person X’s total income would be $101,600 for the year.

Line 9: $101,600

Adjustments: During the year, Person X makes contributions of $8,000 to their HSA (health savings account) and also pays $12,000 in attorney’s fees for a discrimination claim against a past employer. Person X’s total adjustments for the year would be $20,000.

Line 10: $20,000

Adjusted Gross Income: Now we subtract these adjustments (Line 10) from total income (Line 9) to arrive at AGI (Line 11). 

Line 11: $81,600

What’s the Difference Between AGI vs MAGI?

If you’ve come across the acronym MAGI before, you may know that it stands for Modified Adjusted Gross Income. While this number is similar to your AGI, it represents your adjusted gross income with some of the subtracted adjustments added back in. For this reason, your MAGI is always going to be at least the same or higher than your AGI. 

Your MAGI is used to calculate certain credits, deductions, and income exclusions, though different adjustments are added back to your AGI for each, so your MAGI doesn’t always stay the same.

MAGI is used to calculate:

  • How much you can receive in child tax credits and adoption tax credits
  • How much you are allowed to contribute to a Roth IRA (individual retirement account) for the year
  • How much you can deduct for tuition or student loans
  • How much you are allowed to exclude from some income types
  • Your income when applying for marketplace insurance

AGI vs Taxable Income

As we’ve already seen, your adjusted gross income is your total taxable income minus some adjustments and qualifying expenses and is written on Line 11. 

On Form 1040, you’ll see standardized deductions that you’re allowed on the side of Line 12. You can choose to use one of these standard deductions or calculate your itemized deductions (using Schedule A). The amount of your deductions goes on Line 12. If you have qualified business income deductions, you write these on Line 13.

On Line 14, you add up Lines 12+13 to get total deductions, then you subtract these from your AGI to arrive at Line 15, your taxable income. This value is used to calculate how much tax you owe for the year.

Understanding Your AGI

Your AGI is your adjusted gross income, the total amount of money you’ve made for the year minus some adjustments. This number is important because it lets you, and the IRS, know how much you can take for certain credits, deductions, and tax exclusions. It’s also useful when you want to take out a loan or rent an apartment as a statement of your annual income. 

As with any tax information, you need to be careful and precise, but calculating your AGI is easy once you know how to arrive at this very important number.

FAQ

No, AGI is adjusted gross income which means it starts with your gross income for the year but then subtracts certain adjustments like student loan payments or HAS contributions. Therefore, your AGI should always be the same or lower than your gross income.

Yes, you can reduce your AGI relative to your gross income, and this will mean you’re liable to pay fewer taxes. One way to do so is to contribute more to an IRA so you can deduct this amount from your gross income. Another common choice is to contribute to a tax-advantaged health savings account (HSA) so you can deduct those contributions and lower your AGI.