What Is Adjusted Gross Income (AGI)?
Adjusted Gross Income (AGI) refers to your total gross income minus specific deductions, known as adjustments, that the IRS allows you to claim. Your AGI is used to calculate your taxable income, which ultimately determines your federal income tax liability.
Gross Income vs. Adjusted Gross Income
Gross Income: This is the total income you’ve earned, including wages, salaries, bonuses, rental income, investment income, and more.
Adjusted Gross Income (AGI): AGI is derived by subtracting specific deductions (called “adjustments”) from your gross income. These adjustments may include student loan interest, retirement account contributions, and health savings account (HSA) contributions.
Your AGI forms the foundation of your tax return. It’s essential because it influences various tax credits, deductions, and exemptions you may qualify for, which can reduce your overall tax liability.
Why AGI is Important for Your Taxes
AGI plays a vital role in your overall tax situation. Here’s why:
Determines Your Taxable Income: AGI is the starting point for calculating your taxable income. From there, you subtract either the standard deduction or itemized deductions to get your final taxable income, which determines your tax bracket and the amount you owe.
Affects Eligibility for Tax Deductions and Credits: Many tax benefits are based on your AGI. For example:
- Child Tax Credit: A higher AGI may phase out your eligibility for this credit.
- Retirement Contributions: Your ability to contribute to certain retirement accounts, like a Roth IRA, depends on your AGI.
- Medical Expenses Deduction: You can only deduct medical expenses that exceed a certain percentage of your AGI.
Affects Your Filing Status and Potential Refunds: A lower AGI may qualify you for more favorable tax treatment, such as a larger refund or a lower amount due. AGI also helps determine whether you qualify for specific tax deductions (like the student loan interest deduction) or credits (such as the Earned Income Tax Credit).
Determines State Taxes: While state tax laws vary, many states use your federal AGI to help determine state income taxes. Your AGI can therefore affect the amount of state tax you owe or the refund you might receive.
Key Adjustments That Can Lower Your AGI
To reduce your taxable income and potentially lower your tax liability, consider making use of common adjustments to income. Here are a few ways to lower your AGI:
Contribute to Retirement Accounts: Contributions to tax-deferred retirement accounts like a 401(k) or traditional IRA lower your AGI. This is a great way to reduce your current tax burden while saving for the future.
Health Savings Account (HSA): If you’re enrolled in a high-deductible health plan (HDHP), contributing to an HSA reduces your AGI and provides a tax advantage for future medical expenses.
Tuition and Fees Deduction: This deduction allows you to deduct certain higher education expenses from your gross income, reducing your AGI.
Student Loan Interest Deduction: If you’re repaying student loans, you can deduct up to $2,500 in student loan interest payments, provided you meet specific income requirements.
Moving Expenses for Active Duty Military: If you’re an active-duty member of the military and are required to move, your moving expenses may be deductible.
Common Questions About AGI
How can I find my AGI on my tax return?
Your AGI can be found on Line 11 of Form 1040 for the 2022 tax year and beyond. If you’re using tax software, this figure will be calculated for you, and you’ll just need to verify it when filing.
Does a higher AGI mean I will pay more taxes?
Not necessarily. While a higher AGI may place you in a higher tax bracket, deductions, credits, and other tax strategies can help reduce your taxable income, thus lowering your overall tax liability.
How do I reduce my AGI?
You can reduce your AGI by taking advantage of deductions like retirement contributions, student loan interest, and health savings accounts. Each tax year, consider reviewing your finances and adjusting your contributions to take full advantage of these opportunities.
