Adjusted gross income is your gross income minus any adjustments. Your gross income includes wages, dividends, capital gains, business income and retirement distributions, as well as other income and adjustments for things like educator expenses, alimony payments or contributions to a retirement account.
What is my adjusted gross income?
Your adjusted gross income is unique to you and can be found on your Form 1040. This form is the U.S. Individual Income Tax Return and on your 2020 taxes, your adjusted gross income will be on line 11.
After you’ve followed the instructions on the form in the lines before that, you’ll end up with the adjusted gross income on line 11. It will require looking at your gross income (which includes wages, dividends, capital gains, business income, etc.) and making any adjustments from expenses, student loans, etc.
If you’re looking back at past years’ forms to understand adjusted gross income, take a look at line 8b in 2019 and line 7 in 2018.
How to calculate adjusted gross income
If you’re following along on Form 1040, this should be pretty straightforward to figure out. The IRS provides instructions (Schedule 1 for Form 1040) on how to fill out your tax return, and any tax preparation service will also walk you through this process.
However, if you’re preparing your taxes at home and want to know exactly how to do this, it’s simple. All you need to do is add up your various incomes. This will be your total gross income. Then, subtract any of the adjustments or tax deductions from that.
There are tax calculators online that you can use to make this even easier. They will also help you determine those deductions. There are several tax deductions you can take, which will lead you to your adjusted gross income. Familiarize yourself with all of them so you can be sure to use them to your benefit. This will also potentially maximize your return — or minimize the amount you’ll have to pay in the end.
There are some restrictions to what you can deduct. Certain tax deductions have limits, like student loan interest (capped at $2,500) or educator expenses (capped at $250).
How your adjusted gross income affects you
Your adjusted gross income is typically the basis for your taxes, not your gross income. The adjusted gross income is a more accurate look at your actual income, which is why it often is considered more heavily. Your adjusted gross income is what will also qualify you for tax deductions and tax credits, which are figured by your income.
Some tax credits and deductions will benefit you more if your adjusted gross income is lower, which is why you want to calculate it properly. For example, if you itemize your deductions, you’ll reduce your medical and dental expenses by 7.5 percent of your adjusted gross income. That means you can only deduct the amount that exceeds 7.5 percent of your adjusted gross income, so the lower that number is, the more of your expenses you can deduct.
These tax credits and deductions will affect your taxable income, and you want to get that adjusted gross income to a place that’s not only correct, but that will maximize your tax return.
Your adjusted gross income is also typically the basis for your state tax return, which is why it’s important to start your federal return first to get that number. Once you’ve completed your federal return and gotten to your adjusted gross income (and figured out your tax deductions and credits), you can move on to your state tax returns using the numbers you’ve already found.
Adjusted gross income (AGI) vs. modified adjusted gross income (MAGI)
Take care when going about the tax deductions and credits, though, as some are looking at your modified adjusted gross income, not the adjusted gross income.
These two are similar, but the modified adjusted gross income will be used for different tax credits and deductions. These will all be outlined on Form 1040 and will be noted in any tax-prep services you use. The modified adjusted gross income will actually add a little bit back into your income, like foreign earned income, student loan interest, IRA deductions and more. Pay close attention to what falls into each bucket as you’re working with your taxes so you can be sure you’re using the proper income at all times.
Figuring out your modified adjusted gross income will also depend on which tax credits and deductions you’re looking at, which is why you should do each deduction carefully. Using tax-preparation services or hiring someone to do your taxes for you is probably the safest bet in figuring out all these numbers, but the IRS provides instructions on their site to guide you through the process.