What is Adjusted Gross Income (AGI)?
Adjusted Gross Income (AGI) is your total gross income for the year, minus specific deductions (also known as adjustments). It’s the starting point for calculating your federal income tax liability.
Why AGI Matters for Taxpayers
AGI determines:
- Your eligibility for tax credits (like the Child Tax Credit, Lifetime Learning Credit)
- Your standard deduction
- Whether you can itemize deductions
- Income phase-out thresholds for tax benefits
- Affordable Care Act (ACA) subsidies
- Your eligibility to contribute to or deduct IRA contributions
IRC Code and Legal Basis for AGI
Under Internal Revenue Code § 62, AGI is defined as gross income minus the deductions listed in that section, which include:
- Educator expenses
- Student loan interest
- Contributions to HSAs
- Certain retirement plan contributions
- Alimony paid (for divorces finalized before 2019)
How to Calculate Your AGI: Step-by-Step
Step 1: Start with Gross Income
Include all income reported on:
- Form W-2 (Wages)
- Form 1099-NEC (Self-employment)
- Form 1099-INT (Interest)
- Form 1099-DIV (Dividends)
- Form 1099-B (Capital gains)
- Rental income, business income, unemployment compensation, etc.
Step 2: Subtract Adjustments to Income
Common adjustments include:
- Student loan interest (up to $2,500)
- Self-employment tax deduction
- HSA contributions
- Traditional IRA contributions
- Educator expenses (up to $300 for 2025)
Step 3: Result = Adjusted Gross Income (AGI)
Use Form 1040, Line 11 to report AGI.
IRS Forms Relevant to AGI
| IRS Form | Purpose |
|---|---|
| Form 1040 | Main tax form – AGI appears on Line 11 |
| Schedule 1 | Lists deductions that adjust gross income |
| Form W-2 | Report wages and withholdings |
| 1099 Series | Report other income types |
Detailed Example of AGI Calculation
Scenario:
- John earns $85,000 from his job (W-2).
- He receives $500 in bank interest (1099-INT).
- He contributes $4,000 to a traditional IRA.
- He pays $2,000 in student loan interest.
AGI Calculation:
Gross Income:
$85,000 (Wages)
+ $500 (Interest)
= $85,500
Adjustments:
– $4,000 (IRA Contribution)
– $2,000 (Student Loan Interest)
AGI = $85,500 – $6,000 = $79,500
How AGI Impacts Deductions, Credits & Refunds
- Tax Credits: AGI is used to determine eligibility and phaseouts.
- Itemized Deductions: Medical expenses are deductible only above 7.5% of AGI.
- Retirement Contributions: Limits for IRA deductibility depend on AGI.
- Education Credits: Phase out based on MAGI (which starts from AGI).
- Premium Tax Credit: For ACA health plans, based on AGI.
Conclusion
Your AGI sets the foundation for everything that happens on your tax return—from what you owe to what you can deduct or claim. For most taxpayers, calculating AGI correctly means more deductions, more credits, and better tax outcomes. If you’re unsure how to calculate yours, consult with a CPA.
CTA and Disclaimer
Let a licensed expert handle your numbers.
Schedule a 1-on-1 consultation with me, Anshul Goyal, CPA, EA, FCA, a licensed Certified Public Accountant in the United States, admitted to practice before the IRS, and a cross-border tax expert assisting American businesses and Indians living in the U.S. with IRS compliance.
FAQs – Top 5 Searched Questions About AGI
1. Where do I find my AGI on the tax return?
AGI is shown on Line 11 of IRS Form 1040.
2. Does AGI include tax-free income like municipal bond interest?
No, tax-exempt interest is excluded from AGI but reported separately.
3. Is AGI the same as taxable income?
No, taxable income = AGI – deductions (standard or itemized).
4. How does AGI affect my tax refund?
Higher AGI may reduce eligibility for refundable credits, lowering your refund.
5. What’s the difference between AGI and MAGI?
Modified AGI (MAGI) is AGI adjusted for specific items, used for benefits like Roth IRA eligibility or ACA credits.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult with a licensed professional for advice specific to your individual situation. Outcomes depend on specific facts and circumstances.