Adjusted gross income (AGI) is one of the most important figures on Form 1040. This amount determines your applicable tax rate and, by extension, your actual tax liability for the year. However, many taxpayers are unfamiliar with how adjusted gross income is calculated, which means that they may not be aware of how their AGI amount fluctuates from year to year. Knowing how to calculate your AGI can help you prepare for your taxes based on the potential change in the amount of income tax you owe.
What is Adjusted Gross Income?
Put simply, adjusted gross income refers to the amount of gross income you received minus any adjustments. On the front page of Form 1040 is a list of several adjustments to income. These include common expenses such as student loan interest, educator expenses, moving expenses, and the self-employment tax deduction. Taxpayers can deduct the applicable adjustments to arrive at the AGI amount for the year.
How Does Adjusted Gross Income Affect Tax Liability?
Adjusted gross income has a major affect on the amount of tax you pay in with your return. For one thing, your total AGI can disqualify you from claiming certain deductions and credits if it exceeds the threshold for your filing status. For example, if you're a taxpayer who files using the head of household tax filing status and you want to claim the Earned Income Credit, your AGI must fall below the appropriate threshold in order to use the credit.
Your AGI can also affect your tax liability by impacting your itemized deductions. If you intend to itemize medical tax deductions, for example, you can only claim the amount that exceeds 7.5 percent of your AGI. If your AGI is high, you may not be able to deduct the majority of your expenses.
Finding Your Adjusted Gross Income
If you'd like to calculate your AGI, your first step is to total up all of your received income. This will include your earnings, salaries, tips, retirement distributions, and self-employment profits. Once you've arrived at the total received during the year, you'll need to find which adjustments to income you can use. If you have paid qualified child support, for example, add up all of your payments and then deduct the total from your total income as an adjustment. Other common adjustments to income include moving expenses, IRA tax deductions, and college tuition. After you deduct all of the adjustments you're entitled to claim, the amount left constitutes your adjusted gross income.
Calculating your adjusted gross income can help you prepare for your expected tax liability. By following the simple formula of adding up your income and deducting your applicable adjustments, you can arrive at your AGI easily.