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How Do I Calculate Adjusted Gross Income (AGI)?

by George Windsor Updated: Investing, Tax

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The amount of tax you are charged at the Federal and State level depends on your Adjusted Gross Income (AGI)? But what is Adjusted Gross Income? And how do you calculate your Adjusted Gross Income?

What Is Adjusted Gross Income (AGI) & Taxable Income(TI)?

What is the difference between Adjusted Gross Income and Taxable Income?

Your Adjusted Gross Income is simply a modified version of your gross income that determines how much of your income is taxable. So how do you calculate your Adjusted Gross Income?

  1. Sum your income for the year from each source: wage income, property sales, pension income, unemployment income, social security payments, and so forth
  2. Subtract applicable deductions to arrive at the Adjusted Gross Income figure

Standard deductions include:

  • Medical expenses
  • Retirement plan contributions, such as to a traditional IRA
  • Losses from property sale or exchange
  • Alimony payments

Once the Adjusted Gross Income is determined, standard federal tax deductions can be applied to arrive at the Taxable Income amount.

The Adjusted Gross Income amount is simply a step in the process of determining how much gross income is taxable.

State tax bills use the Federal Adjusted Gross Income as the starting point. Your State Taxable Income will be determined by deducting specific state credits.

Your Adjusted Gross Income will be calculated for you by tax software packages which can expedite the process.

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What Adjustments on 1040, 1040A & 1040EZ Forms Are Allowed?

What adjustments are available on each form: 1040, 1040A, and 1040EZ

  • Form 1040 permits all deductions and credits and is available to anyone regardless of filing status but it is the longest of all the forms
  • Form 1040A permits you to claim tax credits, such as educational expenses and paid student loan interest, but not necessarily deductions. The 1040A is intended for you if you don’t plan to itemize your deductions for items like mortgage interest
  • Form 1040EZ is the shortest of the 1040 forms, allows for easy filing with tax software packages, but prohibits you from claiming any credits or deductions, unless it is for the Earned Income Tax Credit

*The Earned Income Tax Credit is intended to lower or eliminate the tax paid by low and moderate-income earners.

*Itemizing your tax deductions means subtracting items, such as property taxes, medical expenses, charitable contributions, mortgage interest and event loss from theft to arrive at a lower taxable income amount.

What Is Modified Adjusted Gross Income (MAGI)?

What is the difference between Adjusted Gross Income and Modified Adjusted Gross Income?

It is necessary to calculate your Modified Adjusted Gross Income (MAGI) if you choose to:

  1. Itemize deductions, such as social security benefits; and
  2. File form 1040

Think of the Modified Adjusted Gross Income as the starting point for determining where credits are phased out.

Modified Adjusted Gross Income is used to determine whether an individual qualifies for tax deductions. It is used to determine how much, for example, of an IRA contribution is tax deductible and whether an individual is available for tax credits.

Modified Adjusted Gross Income is calculated after finalizing the Adjusted Gross Income number. To calculate MAGI, add back certain deductions to AGI. The deductions that may be added back include IRA contributions, rental contributions, student loan interest and tuition.

For Form 1040A, the Modified Adjusted Gross Income and Adjusted Gross Income are identical.

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How Does AGI Affect Itemized Deductions?

What is the effect of AGI on itemized deductions?

The lower your Adjusted Gross Income, the lower the threshold for deductible costs. Only amounts greater than 7.5% of Adjusted Gross Income may be deducted for medical and dental expenses. You will find that your AGI amount limits the itemized deductions that can be claimed on Forms 1040 and 1040A.

The amount of tuition you can deduct depends on your Modified Adjusted Gross Income (MAGI). And MAGI can lower or eliminate adjustments to AGI!

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