Adjusted gross income

What is adjusted gross income?

Adjusted gross income (AGI) is a key figure for determining a person’s tax rate and eligibility for tax deductions under the U.S. Internal Revenue Code. On Internal Revenue Service (IRS) form 1040, taxpayers enter their gross income and subtract certain adjustments and tax deductions, resulting in adjusted gross income. Modified adjusted gross income (MAGI) is a closely related figure that determines the deductible amount from an individual retirement account (IRA).

Deeper definition

Gross income is simply a taxpayer’s income from all sources before taxes, adjustments, or deductions. Adjustments made to this figure to calculate AGI are referred to as above-the-line deductions. Tax laws change every year, so the exact adjustments available are subject to change; however, some appear consistently year after year. Additionally, the forms that an individual uses to file a tax return can impact the number of deductions available.

Above-the-line deductions include:

  • Expenses for classroom materials and supplies.
  • Unreimbursed medical expenses.
  • Moving expenses for a new job.
  • Tuition payments and student loan interest.
  • Alimony payments.
  • Health savings account contributions.
  • IRA and 401(k) contributions.

After above-the-line deductions, AGI determines a taxpayer’s tax bracket and his or her eligibility for below-the-line deductions, tax exemptions, and tax credits. Below-the-line deductions include the standard deduction and itemized deductions.

In most instances, a lower adjusted gross income equates to a higher number of deductions and credits available to an individual.

Modified adjust gross income

Modified adjusted gross income determines whether an individual’s IRA contributions are deductible or not. MAGI is calculated by taking the adjusted gross income figure and adding back in certain other deductions. Some of these added-back deductions are rare or obscure, so for many taxpayers, MAGI and AGI are identical.

The following deductions are added back to AGI to arrive at MAGI:

  • Tuition payments and student loan interest.
  • Passive income (or losses), losses from a publicly traded partnership.
  • Social security payments and IRA contributions.
  • 50 percent of self-employment tax.
  • Income from U.S. savings bonds.
  • Certain adoption expenses.

Individuals cannot deduct IRA contributions if their modified adjusted gross income is above a certain threshold.

Estimate your tax rate with Bankrate’s handy 1040 tax estimator.

Adjusted gross income example

As outlined above, a taxpayer’s AGI determines eligibility for certain tax deductions and tax credits.

Unreimbursed medical expenses may be itemized for deduction. When doing so, the IRS requires filers to reduce the total medical expense by 7.5 percent of AGI. If a taxpayer reports $15,000 in medical expenses and an AGI of $120,000, the deduction is reduced by $9,000, leaving only $6,000 to deduct. However, if the AGI is $60,000, the reduction is only $4,500, leaving $10,500.

As of 2016, a single filer that has a retirement plan through her workplace could not deduct IRA contributions if their MAGI was $71,000 or higher. The same filer would be ineligible for the tuition deduction if she had an MAGI of $80,000 or higher.

 

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