what is adjusted gross income
Updated September 23, 2021

What Is Adjusted Gross Income?

Personal Taxes

Adjusted gross income (AGI) is a taxpayer’s gross income minus certain adjustments to income allowed by the IRS.  These adjustments do not include itemized deductions.

Learn what adjusted gross income is and how to calculate it.

Definition and Example of Adjusted Gross Income

Adjusted gross income is a tax calculation that adds up a taxpayer’s total income and then subtracts from their total income certain adjustments allowed by the tax code.

For example, if a taxpayer makes $50,000 a year from their job and paid $2,000 of student loan interest during the year, their adjusted gross income would be $48,000.

How Adjusted Gross Income Works

Adjusted gross income is calculated on Line 11 of Form 1040.

Once it has been calculated, adjusted gross income may be used to calculate other components of a taxpayer’s tax return.

Calculation of Adjusted Gross Income

Adjusted gross income is the sum of all of a taxpayer’s items of income as well as certain taxpayer-favorable adjustments allowed by the tax code such as the health savings account deduction, the deduction for moving expenses, and the student loan interest deduction.

However, adjusted gross income does not include a taxpayer’s qualified business income deduction or itemized deductions; these amounts are subtracted from adjusted gross income to determine taxable income.

Adjusted Gross Income and Other Tax Calculations

Once adjusted gross income has been calculated, it may be used to calculate the amount of other tax benefits a taxpayer is eligible for.

For example, if a taxpayer paid medical and dental expenses during the year, they may be eligible to take the medical expense deduction if they itemize their deductions.

However, a taxpayer’s medical expenses are only deductible to the extent that they exceed 7.5% of their adjusted gross income.

So in order for a taxpayer to determine one’s deductible medical expenses, they must first calculate their adjusted gross income; this is why adjusted gross income is calculated before itemized deductions because the calculation of some itemized deductions depends on a calculator’s adjusted gross income.

Other tax items that depend on a taxpayer’s adjusted gross income or some modification of it include the taxable amount of Social Security income, the Child Tax Credit, and the Earned Income Tax Credit.

Adjusted Gross Income vs. Taxable Income

Adjusted gross income is different from taxable income.

While adjusted gross income is used to calculate other tax items, taxable income is the income amount used to actually calculate a taxpayer’s tax liability for the year.

Here is the formula showing the relationship between a taxpayer’s adjusted gross income and their taxable income:

Adjusted Gross Income
– Standard Deduction or Itemized Deductions
– Qualified Business Income Deduction
= Taxable Income

Adjusted Gross Income vs. Modified Adjusted Gross Income

Sometimes, the calculation of a particular tax item for a taxpayer depends not on adjusted gross income as reported on the taxpayer’s tax return, but on a modification of the taxpayer’s adjusted gross income.

This modification is referred to as modified adjusted gross income (MAGI), and its calculation can differ based on the tax item being calculated.

MAGI and Student Loan Interest Deduction

For purposes of calculating a taxpayer’s student loan interest deduction, a taxpayer’s MAGI is their AGI without respect to the student loan interest deduction.

If the taxpayer’s MAGI is less than $70,000, ($140,000 if they are married filing jointly), then the taxpayer is eligible to deduct all of their student loan interest paid up to the maximum deduction of $2,500.

If their MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if they are married filing jointly), then the taxpayer is eligible to take a student loan deduction of less than $2,500.

If their MAGI is above $85,000 ($170,000 if they are married filing jointly), then they are not eligible to take the student loan interest deduction.

MAGI and Social Security

For purposes of calculating how much of one’s Social Security benefits are taxable, MAGI is calculated as AGI plus nontaxable interest plus one-half of their Social Security benefits.

If the taxpayer’s MAGI is less than $25,000 ($32,000 if they are married filing jointly), then the taxpayer will likely not need to include any of their Social Security benefits in their income.

If their MAGI is between $25,000 and $34,000 ($32,000 and $44,000 if they are married filing jointly), the the taxpayer may have to pay tax on up to 50% of their Social Security benefits.

If their MAGI is above $34,000 ($44,000 if they are married filing jointly), then they may have to may tax on up to 85% of their Social Security benefits.

Adjusted Gross Income: Conclusion

Here’s the bottom line of what you need to know about adjusted gross income:

  • Adjusted gross income is a tax calculation that adds up all of a taxpayer’s income and subtracts certain adjustments allowed by the tax code.
  • Adjusted gross income is calculated on Line 11 of Form 1040.
  • Adjusted gross income or a modification of it may be used to calculate other components of a taxpayer’s tax return.
  • Adjusted gross income is not the same as taxable income.

Author:

Logan Allec, CPA

Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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