What Is Adjusted Gross Income?

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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 earnings along with any incidental costs you incurred related to your career move. 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 Is Gross Income?

Before you calculate what is adjusted gross income, you must determine the total gross income you earned for the tax year in which you're filing. Gross income is the amount of money, typically on a paycheck, before payroll taxes. However, it isn't limited to your paycheck and can include all of the money you earn from other sources, too.

Gross income can include other employment earnings in addition to salaries, such as bonuses, as well as interest and dividends, long and short-term capital gains and losses, interest, dividends, alimony, pensions and annuities, rental property income, royalties, and any revenue 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, side jobs, and other sources of income.

The list of items that contributes to your total gross income is extensive, and you may need help determining what's considered income for this purpose. Tax software will help you identify all earnings that need to be reported to the government by asking questions in the tax interview, or you can ask an accountant for advice.

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 pretax benefits like health insurance premiums.

Calculating Your AGI

Your AGI is calculated on the first page of your U.S. federal tax return. Calculating AGI is an important first step because it serves as the foundation for determining the deduction and credits you may qualify for and the income tax you owe. To determine your AGI, start with your gross income and subtract qualifying items to reduce the amount. Common items can include:

  • Educator expenses, such as supplies paid for by teachers
  • Business expenses including gas mileage or equipment rental fees
  • Moving expenses
  • Health care savings account deduction
  • College tuition and fees or student loan interest
  • Contributions to certain retirement accounts
  • SEP-IRA, SIMPLE IRA and 401(k) deductions for the self-employed
  • Penalties from financial institutions for early withdrawal of savings
  • Jury duty pay sent directly to the juror's employer
  • Alimony payments

If you're doing your own taxes, tax software can automatically calculate your AGI. The use of software can help you avoid any mathematical errors because the software will accurately do all of the tax calculations as it walks you through the tax interview. Otherwise, if you don't understand the difference between AGI and gross income or how to calculate it, you may pay more than you need to in income taxes.