Your adjusted gross income (AGI) is your gross income minus certain deductions, also known as adjustments. Your AGI isn’t the same as your taxable income, but finding your AGI is a necessary intermediate step for determining your taxable income.
Once you know your AGI, you can determine whether or not you qualify for a number of other deductions and allowances. For example, on your 2020 taxes, which are due on Tax Day 2021, it’s possible to deduct medical expenses that exceed 7.5% of your AGI. So to know how much you can deduct, you need to first calculate your AGI.
How to calculate your AGI
The first thing you need in order to calculate AGI is your gross income. This is all of the income you earned throughout the year. That includes earnings from your W-2 and 1099 forms, as well as other income like Social Security benefits and alimony payments.
Some income is not subject to federal income tax, so you subtract (deduct) it from your gross income. After you account for those deductions, you have your AGI.
There are more than a dozen potential deductions. One common example is for contributions you make to a health savings account (HSA). Even though the money you contributed was part of your income for the year, the federal government doesn’t collect tax on money you put into an HSA. So when you determine your AGI, you can deduct your HSA contributions.
You may also hear people refer to above-the-line deductions. These are the deductions you make from your gross income in order to get to your AGI. (Learn more about above-the-line deductions vs below-the-line deductions.)
Conversely, a below-the-line deduction is money you deduct from your AGI when you itemize deductions. Common examples are the deductions for charitable contributions, mortgage interest, and medical expenses.
Possible deductions when calculating AGI
For the 2019 tax year, which you file in early 2020, these are the main deductions you can make to find your AGI:
Individual retirement account (IRA) contributions
Health savings account (HSA) contributions
SEP IRA and SIMPLE IRA plan contributions
Self-employed health insurance premiums
Half of the self-employment tax
Alimony payments
Moving expenses for members of the armed forces
Education expenses
Penalties on early withdrawal from CDs and other savings accounts
Certain business expenses of reservists, performing artists, and fee-basis government officials
There were additional above-the-line deductions prior to the 2018 tax year, but some were eliminated and others were changed during the tax reform in 2017. If you think you can claim a deduction that wasn’t mentioned above, make sure to double check the instructions on the latest Form 1040.
AGI vs. taxable income
After you calculate AGI, you can take either the standard deduction or you can take the total of your itemized deductions, whichever is worth more. What’s left after you deduct that amount is your taxable income. So finding your AGI is necessary for getting your taxable income.
What is modified adjusted gross income (MAGI)?
To determine whether or not you qualify for certain deductions, you need to use your modified adjusted gross income (MAGI) instead of your AGI. The difference is that MAGI adds back some of the deductions you’re allowed to make when calculating AGI. AGI and MAGI are the same or very similar for most people.
Deductions you can take for your AGI but not your MAGI include the following:
Half of the self-employment tax
Tuition and fees deduction
Student loan interest
Rental losses
IRA contributions
Interest from U.S. savings bonds and municipal bonds
Tax-exempt pension and Social Security benefits
Foreign income
One of the most important uses of MAGI is to determine whether or not you can contribute to a Roth IRA.
AGI on state tax returns
Just like the federal government, states with an income tax determine your taxable income by first calculating some sort of AGI. Most states start with your federal AGI and then allow some state-specific adjustments. It isn’t uncommon if your state AGI is slightly lower than your federal AGI.
