Last updated Feb. 12, 2023 by Peter Jakes
You must know your income while filing taxes, whether you are a small business owner, sole proprietor, or employee. Your income influences your tax rate and the amount you owe the IRS (or the amount of your tax refund).
The IRS has several methods for determining income, each of which serves a particular purpose. The income tax you owe is calculated using your adjusted gross income.
Keep reading to calculate adjusted gross income without needing a tax professional. Also, we will give you an example of a calculated AGI to learn with.
Adjusted gross income (AGI) is the figure the IRS uses to determine your income tax liability for the year. It is computed by deducting from gross income various modifications, such as company expenses, student loan interest payments, and other expenses. Deductions are subtracted following the calculation of a taxpayer’s AGI to determine taxable income.
We’ve heard this question before when taxpayers seek assistance with their taxes. Let’s face it: tax terminology may be perplexing.
When discussing revenue, various phrases sound similar but have different definitions and functions. Understanding these terms in greater depth can help us better comprehend what Adjusted Gross Income is and isn’t.
If you receive a salary, your employer will fill out a W-2 form to report your income and send it to you. In Box 1, you can find the total amount of “wages, tips, and other compensation” you got. It’s important to remember that this is not your adjusted gross income.
In Box 1 of your W-2 form, you can find the total amount of your taxable income from that job. It doesn’t take into account some above-the-line deductions that are part of how your adjusted gross income is calculated.
For instance, your total “wages, tips, and other compensation” don’t include the money you pay for school tuition or interest on student loans.
If you work part-time for more than one employer or change jobs throughout the year, you’ll get more than one W-2 form (one for each employer). You may also have income sources that aren’t listed on your W-2, like rent from your property.
Read also, How to Change Your Credit Card Due Date
Your gross income is the total amount of money, property, and the value of services you got from all sources. Before taxes are figured out, adjustments and deductions are taken out of the gross income. Some of the things that go into your gross income are:
- Pension income.
Taxable income is your AGI minus these three things:
- The standard deduction or
- Total itemized deductions, whichever is greater, and
- The qualifying business income deduction, if applicable.
Your taxable income determines tax brackets. Personal and dependent exemptions, which may have reduced your taxable income, were repealed from 2018 through 2025 due to the Tax Cuts and Jobs Act modifications.
According to the United States tax code, AGI is an adjustment to gross income. Gross income is the total amount of money earned in a given year, including:
- Rental income
- Capital gains
- Retirement payments
- Interest income
- Alimony before taxes and other deductions.
AGI makes various modifications to your gross income to arrive at the amount upon which your tax due is computed.
The types and sources of incomes that Adjusted Gross Income can be calculated from include the following:
- Unemployment benefits
- Farm income
- Union strike benefits
- Court judgment awards
- Jury duty fees
- Taxable refunds, credits, or offsets of state and local income taxes
- Long-term disability benefits received prior to minimum retirement age
- Security deposits and rental property income
- Awards, prizes, gambling, lottery, and contest winnings
- Back pay from labor discrimination lawsuits
- Spousal support
- Capital gains
- Severance pay
- Earnings partnerships, rental real estate, trusts, royalties, S corporations, and license payments
- Social Security payments.
- Pensions funds.
Adjustments to income are deductions that directly take money out of your total income. This is how your AGI is calculated. The types of adjustments you can deduct can change from year to year, but there are a few that always show up on tax returns.
Here are some of the most common adjustments, along with the separate tax forms that are used to figure out some of them:
- Alimony payments
- Self-employment tax (the deductible portion)
- Educator expenses
- Armed services reservists, qualifying performing artists, fee-based state or local government officials, and employees with impairment-related work expenses (Form 2106)
- Health Savings Account (HSA) deductions (Form 8889)
- Early withdrawal penalties on savings
- Half of the self-employment taxes you pay
- alimony payments made to a former spouse (for agreements prior to 2019).
- Contributions to certain retirement accounts (such as a traditional IRA)
- Self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
- Self-employed health insurance deduction
- Moving expenses for members of the armed forces (Form 3903)
- Student loan interest deduction
Add up all of your income to get your gross income, then take out any adjustments and tax deductions that are above the line. Schedule 1 for Form 1040 gives detailed instructions on how to fill out your tax return, and any service that helps you do your taxes can walk you through this process.
There are online tax calculators that can help you figure out how much you can deduct. When figuring out your AGI, you should also think about the above-the-line tax deductions. These could help you get the most money back or pay the least amount of tax.
But there are limits to some tax breaks. For example, the most you can spend on student loan interest is $2,500, and the most you can spend on teacher expenses is $250.
Step 1: Determine your income for the year and assemble all your Income statements (we have listed them in this article)
Ensure you check the final pay stub of the year and the Form W2 (for your wages and salaries, anything listing your self-employment), Form 1099-B, Form 1099-S, Form 1099-INT, and Form 1099-DIV to check all your taxable income.
Do this by calculating the total amount of money you’ve earned over the course of a year. Include any bonuses you’ve earned or anticipate receiving. The math becomes a lot simpler if you’re paid on a yearly basis.
It’s possible to use your hourly wage multiplied by the number of weeks you worked to figure this out, but it’s also possible to use your check as a guide. Your annual wage will be determined by this calculation. It’s a good idea to include your spouse’s annual income and bonuses on your joint tax return if you’re married.
Here are the incomes you can deduct:
- Benefits from workers’ compensation
- Child support payments
- Proceeds from life insurance (unless the policy was turned over to you for a price)
- Disability benefits
- Gains on the sale of your primary residence
- Money received as a gift or other assets inherited
- Debts that were canceled as a gift to you
- Grants for scholarships or fellowships
- Payments for foster care
- Transferring funds from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)
To arrive at your Adjusted Gross Income, you must first deduct these expenses.
Multiplying by 12 gives you your yearly net income. Due to circumstances like surprise bonuses, unexpected overtime, and more, this amount is also subject to change. Any of the several, completely free AGI calculators available online can be used.
AGI calculation example
Jakee has calculated his annual income to be $100,000 after deducting his pay and benefits. He also pays $15,000 per month in alimony, $10,000 in business expenditures, and $12,000 in school tuition fees every year.
He’d add 15,000, 10,000, and 20,000 to his annual deductions. This means that his deductions total $37,000. He’d then deduct this amount from his $100,000 annual income to arrive at an adjusted gross income of $63,000.
If you don’t have the time or experience to follow the IRS’s instructions and undertake any necessary research, it may be more practical to hire a tax expert.
Even if hiring a tax professional costs extra, the time and irritation you’ll save by not attempting to work out the regulations on your own may make it well worth it.
Add all sources of income together and remove any tax deductions from that total using the income tax calculator. Your AGI can even be zero or negative based on your tax status.
Your adjusted gross income may appear confusing, but the tax forms you fill out when completing your tax return will lead you through the process.
The IRS Form 1040 contains lines for additional income and income adjustments, which you’ll list on Schedule 1 once you’ve added up all your pay.
You don’t have to remember all the deductions that apply to your adjusted gross income because Schedule 1 has specific lines for each additional income or adjustment type.
IRS Form 1040 Line 11 asks for your adjusted gross income, which is the result of adding up all of your earnings and deducting the adjustments.
Itemized deductions are required if you have other personal deductions that are not included in the list (such as capital gains). For this, you’ll need an IRS Schedule A.
Many of these deductions are only deductible if and to the extent that they exceed a certain percentage of your adjusted gross income (AGI). As a result, the higher your AGI, the less deductions you can claim.
Having your itemized deductions reduced is bad enough, but it might get worse. If your AGI reaches a specific threshold, many itemized deductions are reduced.
Your adjusted gross income affects how much you can cut your taxable income with deductions and credits. Think about how AGI affects medical and dental costs for taxpayers who itemize.
People who itemize their taxes can only deduct medical and dental bills that are more than a certain percentage of their adjusted gross income.
This limit will remain at 7.5% of your AGI for 2021. This means that you probably won’t be able to deduct your medical and dental costs if they don’t add up to more than 7.5% of your AGI.
The amount you can deduct for tuition and donations to charity is also limited by your AGI. Most of the time, you can only deduct qualified charitable contributions you made up to 50% of your adjusted gross income (AGI).
So, your AGI has a big impact on what deductions and credits you can claim and how much they are worth.
If you live in a state that taxes income, your adjusted gross income is even more important. Many states start their state income tax calculations with your federal adjusted gross income (AGI).
Before you can figure out your adjusted gross income, you need to know how much you made in “gross income,” which is the total amount on Form 1040, for the tax year you’re filing.
Before taxes, your gross income is all of the money you made from your paychecks. But it’s not just the money you get from your job, it also includes money you get from other places.
In addition to salaries, gross income can also include things like
- Long-term and short-term capital gains and losses
- Pensions and annuities
- Rental property income
- Royalties, and any money made from running a business.
Also, if you sold anything on eBay, Craigslist, or another online store, you made money by making a profit.
Gross income also includes:
- Net gains from selling assets, like a house or car.
- Money from self-employment, consultancy services, side jobs, and other sources.
On the first few lines of Form 1040 and Part I of Schedule 1, you list all of these sources of income.
Calculating your AGI is a crucial step toward finding out how much of your income is taxable. It can be pretty easy if you know what parts of your income make up the total amount.
Some of these situations can be tricky, though, because tax laws and forms are always changing. It’s a good idea to get help from an accountant or a good piece of tax software. Also, many financial advisors can help you plan your taxes and file them.
Here are some frequently asked questions on Adjusted Gross Income
Adjusted gross income is one way to look at how much money you made before taxes. After you figure out your AGI, you can use either the standard deduction or the total of your itemized deductions to figure out how much of your income is taxable.
The lower your AGI, the more eligible adjustments to income you can claim. These include contributions to a 401k, interest on student loans, health insurance premiums if you’re self-employed, and moving expenses if you’re an active military member.
Tax-loss harvesting is an additional method for reducing your AGI by reducing your gross income. The goal is to reduce your net capital gain by selling investments at a loss to offset those that have increased in value significantly (one of the items that make up your gross income).
Therefore, if you had an annual loss of $10,000 and a gain of $18,000, only the difference ($8,000 capital gain) would be taxable.
For the majority of taxpayers, modified adjusted gross income, or MAGI, is simply adjusted gross income before deducting student loan interest, according to the IRS.
You may need to calculate your MAGI if you itemize on Form 1040 in order to claim certain deductions. It can also be used to calculate the phase-out level for certain tax credits and tax-saving strategies, and the MAGI formula varies depending on the tax benefit to which it applies.
If you use online tax software to file your returns, you will most likely be asked to provide your previous year’s AGI as a verification step before submitting your returns.
Line 11 of IRS forms 1040 and 1040-NR contains your AGI from the previous tax year. Even if you file electronically, it’s a good idea to keep a copy of your tax return for future reference.