Adjusted gross income (AGI) is your gross income less certain deductions. It is a measure of income used by the Internal Revenue Service (IRS) of the United States to determine a taxpayer’s liabilities. Knowing your AGI might assist you in determining your taxable income after certain qualifying deductions. In this article, we define AGI, discuss how to calculate it for student loans or even for taxes, and how best to identify it on form W-2 or 1040.
What Is Adjusted Gross Income (AGI)?
Your adjusted gross income is your gross income with fewer deductions and adjustments. When you calculate your AGI, you may see how much of your income is taxable after specific deductions. Your AGI is one of the most crucial factors on a tax return because it helps the IRS calculate how much tax you owe. You can calculate and report your AGI on IRS Form 1040 or W-2.
You need to calculate your adjusted gross income, or AGI, which is critical when it comes to submitting your annual income taxes. More specifically, AGI appears on your Form 1040 or W-2 and helps establish the deductions and credits you are entitled to, and when you calculate it, the whole process becomes easier.
Your AGI is also used to determine the benefits, tax credits, deductions, and social programs you are qualified for. For example, you may be allowed to deduct non-reimbursed medical expenses if they exceed 7.5% of your AGI. The bigger your deduction, the smaller your AGI.
Why Is AGI Important?
Your AGI is important for various reasons, including:
#1. Taxable income
Your AGI is not the same as your taxable income, although it is used to calculate it. Subtract a standard or itemized deduction from your AGI to arrive at your taxable amount. Your taxes will be cheaper if your AGI is lower and you need to calculate it well for that to happen. Qualified business income and charitable contributions can also be deducted to reduce taxable income where applicable.
#2. Itemized Deductions
If you itemize your deductions on Form A, the AGI will decide how much of certain costs you can deduct. The following are the specific limitations:
- Only medical and dental expenses that exceed 7.5% of AGI are deductible.
- Deductions for charitable contributions are normally restricted to 60% of AGI, though lesser restrictions may apply in specific circumstances.
- Only qualifying casualty and loss expenditures that exceed 10% of AGI are deductible.
#3. Program Eligibility
Certain tax credits and assistance programs also utilize AGI to assess eligibility. For example, the AGI is requested on the Free Application for Federal Student Assistance, also known as the FAFSA, to calculate eligibility for educational grants and loans.
How to Calculate Adjusted Gross Income
Consider the following procedures if you’re wondering how to calculate adjusted gross income:
#1. Find your income statements
Get all of your income statements before you begin calculating your adjusted gross income. This includes your W-2 or 1040 for wages and salaries, anything indicating self-employment income, and any income recorded on various 1099 forms, all of which must be present before you calculate the AGI.
In addition, enter any other taxable income you may have, as this will help you calculate your overall annual income. Other sources of taxable and nontaxable income are listed below:
Taxable Income:
Taxable income is the portion of your total income that the IRS considers taxable. It includes both earned and unearned income. The following are examples of taxable income from sources other than your wage or salary:
- Business income
- Union strike benefits
- Farm income
- Long-term disability benefits you receive prior to your retirement
- Taxable credits, refunds, or offsets of local and state income taxes
- Security deposits and rental property income
- Jury duty fees
- Back pay from labor discrimination lawsuits
- Prizes, awards, lottery, gambling, and context winnings
- Earnings from rental real estate, partnerships, royalties, trusts, and license payments
- Severance pay
- Capital gains
- Unemployment benefits
- Spousal support
Nontaxable Income:
Nontaxable income is income that you receive but do not have to pay taxes on. Although some types of payments are not taxed, the IRS requires you to report them on your tax return. These are some examples of income that do not contribute to your AGI:
- Child support benefits
- Workers’ compensation benefits
- Disability payments
- Life insurance proceeds, unless the insurance provider turns over the policy to you for a price
- Foster care payments
- Fellowship or scholarship grants
- Canceled debts intended as a gift to you
- The money you’ve received as a gift or other inherited assets
- Capital gains on the sale of your primary house
- Money transferred from one retirement account to another if done through a trustee-to-trustee transfer
#2. Determine your total annual income
Begin estimating your total annual income once you’ve acquired all of your income documents. You can do so by adding up all of your earnings over the course of a year. Include any bonuses you earn in your yearly income. If you are paid on a yearly basis, your employer will frequently undertake the majority of the work for you.
If you work by the hour, you can refer to your pay stub or simply multiply your hourly wage by the number of hours worked each week and then multiply that number by 52. This calculates your annual pay. If you’re married and filing a joint tax return, enter your spouse’s annual income and bonuses because this applies to your entire family.
#3. Take the sum of your deductions
Examine certain expenses and deductions. Some of the deductions you make from your gross income may change from year to year, while others may remain constant. Following are some examples of gross income deductions that result in AGI:
- Healthcare savings account (HSA) contributions
- Self-employed health insurance premiums
- School tuition
- School fees
- Student loan interest
- Alimony paid
- Educator expenses
- Self-employment taxes
- Penalty on the early withdrawal from your savings account
- Moving expenses
- Certain individual retirement plan contributions
- Certain business expenses
When accounting for these deductions, there are various conditions to consider, so make sure you meet them before adding them to your computation. Also, not all deductions are allowed when determining your AGI. Once you’ve decided which to deduct from your gross income, total all of your deductions and costs.
#4. Subtract your deductions from your total annual income
You can reduce your deductions from your total annual income now that you know your entire annual income and total deductions. As a result, your annual adjusted gross income is calculated. The formula is as follows:
AGI = Total annual income − Eligible deductions
Simply divide this figure by 12 to get your monthly adjusted gross income. This figure may also alter depending on a variety of factors. These factors may include unexpected bonuses and working more hours than intended.
Where do you find your Adjusted Gross Income on the W-2 form?
Because your W-2 form only reveals unadjusted gross income from that individual employer, you won’t be able to see your AGI on it or have anything to calculate.
But you can compute and calculate your adjusted gross income (AGI) using W-2 forms. The various boxes detail your income and the amounts withheld by an employer, which you can use to calculate your AGI as described above. The only place you’ll find the complete AGI is on your original, unamended tax return copy or official IRS transcript.
If you need assistance calculating your Adjusted Gross Income for the most recent tax year, there are several AGI Calculators available online where you can enter all of your information and get the final result.
How Your Adjusted Gross Income Affects Your Taxes
The amount to which you can use deductions and credits to lower your taxable income is affected by your adjusted gross income. Consider how AGI affects medical and dental spending for taxpayers who itemize.
Individuals who itemize can deduct just the portion of eligible medical and dental costs that exceed a certain percentage of their AGI. This limit is 7.5% of your AGI for the tax year 2022, which you file in early 2023. This means that if your medical and dental expenses do not reach 7.5% of your AGI, you will almost certainly be unable to deduct them.
Tuition and charity donation deductions are also subject to AGI limits. In general, you can deduct qualifying charitable contributions only up to 50% of your adjusted gross income. As a result, your AGI has a major impact on which deductions and credits you can claim and how much they are worth.
If you live in a state that collects state income taxes, your AGI is extremely important, and it’s highly essential to calculate it. Many jurisdictions take their time to base their state income tax calculation on the AGI from your federal return.
What Are the Most Common Deductions I Can Take on My Adjusted Gross Income?
When computing your AGI, the following are the most typical deductions you can claim:
- Alimony payments
- Early withdrawal penalties on savings accounts
- Educator expenses (capped at $250)
- Health Savings Account (HSA) deductions (Form 8889)
- Self-employed health insurance
- Self-employment tax (half of your total SE tax is deductible)
- Contributions to a qualified retirement account
- Interest on student loans (limited to $2,500)
AGI Sample Calculation
Let’s calculate an AGI for a lone proprietor who additionally receives rental revenue and makes student loan payments.
- Income from business: $61,000
- Income from rental unit: $13,500
- Estimated self-employment taxes paid during the year: $9,400
- Self-employed health insurance payments: $5,000
- Interest paid on student loans: $2,000
Their gross income would be $74,500, which is equal to their salary ($61,000) plus rental income ($13,500).
You deduct (or claim) above-the-line deductions from the $74,500, which include student loan interest, self-employed health insurance payments, and half of the amount paid for self-employment taxes.
As a result, you have:
- AGI = $74,500 – ($2,000 + $5,000 + $4,700)
- AGI = $74,500 – $11,700
- AGI = $62,800
In this scenario, their adjusted gross income is $62,800.
Using IRS Form 1040 to Calculate AGI
Remembering how to compute your adjusted gross income may be difficult, but the tax documents you fill out when filing your income tax return form will lead you through the process.
The IRS Form 1040, in particular, helps you calculate all of your pay and then gives lines for additional income and income adjustments and also an accurate AGI.
Schedule 1 comprises lines for each form of additional income or adjustment, so you don’t have to remember all of the deductions that apply to your adjusted gross income.
You’ll report your adjusted gross income (AGI) on IRS Form 1040, Line 11, after you calculate your entire income and subtracting the adjustments.
How does AGI affect my Student Loans Payment?
Your adjusted gross income is the sum of your gross income less certain deductions. The income-driven repayment options will calculate your monthly payment or student loans based on your AGI.
Your AGI and the monthly payment required on your federal student loans are inextricably linked. Your monthly payment will be reduced if your AGI is lower. Similarly, the greater your AGI, the greater your monthly payment.
Because your AGI is directly related to your student loans, lowering your AGI is the simplest approach to reducing your monthly payment. This is exactly how to calculate AGI for student loans.
How do I get my AGI from taxable income?
This is your AGI less the standard deduction or the amount of itemized deductions, whichever is greater, and the qualifying business income deduction, if applicable. Your taxable income will be used to establish your tax bracket.
How do I calculate my AGI from my W-2?
Your AGI can be found in Box No. 1 of your W2, and it is a mix of your wages, tips, compensation, and the addition of boxes 2 to 14. Please do not repeat the process of adding boxes 2-14 to box 1 of your w2.
Is AGI the same as net income?
Your adjusted gross income is the amount of money you earn each month that is taxable. Individual tax returns solely use AGI. Although AGI and net income are sometimes used interchangeably, they are not the same thing. AGI is total taxable income, whereas net income is after-tax income.
Where can I find my AGI from last year?
- You can obtain your original AGI from your previous year’s tax return by doing one of the following:
- To examine your Previous Year AGI, use the IRS Obtain Transcript Online tool.
- Call the IRS at 1-800-829-1040 for assistance.
- Fill out Form 4506-T Transcript of Electronic Filing for free.
In Conclusion
Determining your AGI is an important step in determining how much of your income is taxable. If you know what elements of your revenue make up the amount, it can be quite simple. This article has a lot of information, including a thorough definition of AGI, how to calculate it for student loans or even for taxes, and how to best identify it on form W-2 or 1040, among others. Analyze these details and make the best of them.
Related Article
- MODIFIED ADJUSTED GROSS INCOME (MAGI): How To Calculate It
- NET PAY: How to Calculate Your Net Pay
- GROSS PAY: Definition and Formula
- HOW TO REDUCE TAXABLE INCOME: Best Simple Strategies!
- REFINANCE CASH OUT: Overview and How It Works
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