What Does AGI Mean and How Do I Calculate It?

Highlights:

• Your adjusted gross income (AGI) is a figure used by the IRS to determine your tax liability, or how much you owe in taxes.
• To find your AGI, first determine your gross income by adding together your earnings. Then, adjust the resulting figure by subtracting the value of your above-the-line deductions.
• A lower AGI can lead to more tax credits, tax deductions, and a smaller tax bill. You can generally reduce your AGI in two ways: by earning less or by taking more above-the-line deductions.

Your adjusted gross income (AGI) has a significant impact on your taxes. AGI influences your tax rate, as well as the tax credits and deductions you can claim. It may also affect your eligibility for loans and certain other benefits and programs.

Learn how to calculate your AGI to help avoid any surprises during tax season.

What is AGI?

Your AGI is a figure used by the IRS to help determine your tax liability, or how much you owe in taxes. Gross income refers to the amount of money you make each year before any deductions. AGI, on the other hand, reflects how much you've earned after certain deductions have been subtracted from your gross income.

Adjustments to your AGI are known as above-the-line deductions because they are listed above line 11 on IRS Form 1040. Deductions below this line are not used to calculate your AGI. Some of the most common above-the-line deductions include payments made toward student loan interest, self-employment expenses, and contributions to certain retirement accounts.

AGI is separate from your taxable income. Taxable income is calculated by subtracting below-the-line deductions — listed below line 11 on IRS Form 1040 — from your AGI. These deductions occur when taxpayers decide to itemize their eligible expenses, rather than take the standard income-based deduction offered by the IRS.

How to calculate your AGI

You won't find your AGI on your W-2, or 1099, because it is made up of more than just your wages. To determine your AGI, you'll need to combine all sources of income, including interest from your savings account and other earnings that aren't listed on your W-2.

To find your AGI, first determine your gross income by adding together your earnings. This may include:

• Wages from your W-2 or 1099s
• Retirement distributions
• Capital gains
• Interest and stock dividends
• Alimony
• Earnings from rental properties
• Unemployment benefits

Next, adjust the resulting figure by subtracting each of your above-the-line deductions. These may include:

• Self-employment taxes
• Educator expenses, if you teach grades K-12
• Student loan interest payments
• Certain retirement account contributions
• Health savings account (HSA) contributions
• Qualifying alimony payments

When you subtract your above-the-line deductions from your gross income, you'll have your AGI.

How to reduce your AGI

A lower AGI can lead to more tax credits, tax deductions, and a smaller tax bill. You can reduce your AGI in two ways: by earning less or by taking more above-the-line deductions. Many taxpayers benefit most from the latter, so here are four straightforward ways to maximize your adjustments this tax season.

1. Put more money into your traditional IRA. Your pre-tax contributions to traditional IRAs may be deductible if you don't have a 401(k) and meet certain IRS income requirements. Just make sure you adhere to the IRS's annual contribution limits for each tax year.
2. Contribute to an HSA. HSAs provide a tax-advantaged way to save for medical expenses. With an HSA, you can save up to the IRS limits, which are generally upwards of $3,000. If you meet IRS requirements, you can deduct your annual contributions.
3. Max out your student loan interest deductions. Each of your student loan payments is split between interest and the principal loan balance. The student loan interest you pay is deductible, although the amount you can deduct varies according to your income and the IRS's yearly limits.
4. Use the qualified charitable distribution (QCD) rule. If you have a traditional IRA and you're taking the required minimum distribution (RMD), or the smallest amount you must withdraw from your IRA each year once you reach a certain age, you may benefit from the QCD rule. This exempts RMDs from increasing their AGI, but only when the funds go directly to a qualified charity. This tactic is generally best for older taxpayers who have no immediate need for cash.

Consider meeting with a qualified tax professional for more assistance in lowering your AGI. Even if you prefer a DIY approach, paying careful attention to your AGI can help you anticipate — and potentially reduce — your tax bill each year.