What is adjusted gross income?

Definition and Example of Adjusted Gross Income (AGI)

Adjusted Gross Income (AGI) is a tax term that refers to your total income after deducting permitted tax deductions, whether you are itemizing deductions when filing your tax return or not.

Example of Adjusted Gross Income

Let’s say you are a teacher at a school who earned a total income of $40,000 from your salary. However, during the year, you purchased classroom supplies amounting to $2,000. You also contributed $1,500 to your individual retirement account (IRA).

The teacher’s expenses and retirement contributions count as deductions from your taxable income, meaning they can be deducted as an expense. As a result, your AGI will be calculated as follows:

Gross Income = $40,000 – $2,000 classroom expenses – $1,500 IRA contribution = $36,500

Types of Income Deductions

Your AGI is calculated on the first page of your U.S. federal tax return (Form 1040) using information from Schedule 1. Calculating your AGI is an important step because it forms the basis for determining the deductions and credits you may be eligible for and the income tax you need to pay. To determine your AGI, you can start with your gross income (taxable income) and reduce the value by qualifying items that lower the amount. These items can include several common expenses such as:

• Teacher expenses, such as supplies paid for by schools on their behalf.
• Moving expenses for military members.
• Health savings account deductions.
• Student loan interest.
• Contributions to certain retirement accounts like SEP-IRA, SIMPLE IRA, and 401(k) for self-employed individuals.
• Penalties assessed by financial institutions for early withdrawal of deposits.
• Alimony payments.

Adjusted Gross Income vs. Gross Income

Before calculating your adjusted gross income, you must determine your gross income—the total gross income reported on Form 1040 that you received during the tax year in which you are filing your tax return. Gross income includes all the money you received from your salary before payroll taxes are deducted. However, it is not limited to just your salary—it includes income you earn from other sources as well. Gross income can include other earnings from work as well as salaries (such as bonuses, for example), as well as interest and long-term and short-term capital gains, dividends, retirement annuities, rental income, and any revenue generated from operating a business.

If you also sold any goods on eBay or Craigslist or another online store, you might have earned income from the profits from selling those goods. Gross income also includes net gains from the disposal of assets, such as selling a house or car, or any money you earn through freelancing, consulting, side jobs, and other income sources. All these sources of income are reported on the first lines of Form 1040 and the first part of Schedule 1.

Frequently Asked Questions (FAQs)

What does adjusted gross income include?

Adjusted gross income includes all sources of income (wages, profits, capital gains, business income, retirement distributions, etc.), but the full amount is reduced by any above-the-line deductions that you qualify for. This depends on your situation, but those deductions might include teacher expenses, student loan interest, family alimony payments, or contributions to retirement accounts.

Is adjusted gross income and taxable income the same thing?

No, but adjusted gross income is a step in reaching the taxable income you need to arrive at. Once you verify your deductions from gross income to arrive at adjusted gross income, you can then apply credits and deductions to reach taxable income.

Source: https://www.thebalancemoney.com/what-is-adjusted-gross-income-1293658

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