What Is Adjusted Gross Income?
Adjusted gross income (AGI) is gross income minus tax deductions that are allowable whether or not you itemize deductions when you file your tax returns. For example, if you relocate to a new state to make a career change, you can deduct moving expenses from your total income along with any incidental costs you incurred related to your career. Another example is a school teacher who purchases necessary classroom supplies, which can be deducted as an expense. Using these deductions will allow you to lower your AGI, potentially resulting in a tax refund.
What's Considered Gross Income?
Gross income includes income from all sources. It's the amount of money, typically on a paycheck, before payroll taxes. However, total gross income comes from sources other than a weekly paycheck including bonuses. It also includes interest, dividends, alimony, pensions and annuities, rental property income, royalties, and any income derived from operating a business.
Also, if you sold any items on eBay, Craigslist, or another online store, you have gained income from profits by selling goods. Gross income also includes net gains on disposal of assets, such as selling a home or car, or any money obtained through self-employment, consulting, and side jobs.
Taxable income includes other employment income in addition to salaries, as well as interest and dividends, long- and short-term capital gains and losses, and other sources of income. The adjustments include certain individual retirement account (IRA) deductions, moving expenses, and unreimbursed business expenses.
The list of income that contributes to your total gross income is extensive and you may need help determining what's considered income. Tax software will help you determine all income that needs to be reported to the government by asking questions in the tax interview, or you can ask an accountant for advice.
Calculating Your Adjusted Gross Income
Your AGI is calculated on the first page of your U.S. federal tax return. This is an important piece of paper because it serves as the basis for the income tax you owe. If you're doing your own taxes, use tax software to automatically calculate your AGI. This way you'll avoid any mathematical errors because the software will accurately do all of the tax calculations as it walks you through the tax interview.
What Can Reduce Gross Income?
Items that can reduce gross income include:
- Business expenses, such as supply costs, gas mileage or equipment rental fees
- Moving expenses
- College tuition or student loan interest
- Contributions to certain retirement accounts
- Penalties from financial institutions for early withdrawal of savings
- Health care savings account deductions
- Jury duty pay sent directly to the juror's employer
- Alimony payments
- Deduction for half the self-employment tax
- SEP-IRA, SIMPLE IRA and 401(k) deductions for the self-employed
Defining Net Income
It's important not to confuse gross income with net income. Net income refers to take home pay or the amount of money earned after payroll withholding, such as state and federal income taxes, social security taxes, and pre-tax benefits like health insurance premiums.