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What Is Adjusted Gross Income?

U.S. taxpayers must report all the income they earn each year to the Internal Revenue Service (IRS), but you are not taxed on all your income. To calculate the amount of tax you owe, you must first calculate the amount of income subject to federal tax. It is a multi-step calculation that starts with determining your gross income and using that number to calculate your adjusted gross income (AGI). Your AGI is then how you find your taxable income.

In addition to being an essential part of calculating your taxable income, AGI determines your eligibility for certain tax credits and tax deductions that can reduce your tax bill. AGI also plays a role when you e-file because the IRS requires you to verify your identity by submitting the AGI you reported on the previous year's income tax return.

The following sections will look at how your AGI is calculated and the impact it can have on your tax liability.

Finding Your Gross Income

Before calculating your AGI, you first need to find your gross income. For tax purposes, an individual's gross income is their total earnings before subtracting adjustments and deductions. Gross income includes more than just what you earn at your job or your business income. Gross income also includes such things as tips, pension payments, Social Security benefits, dividends, capital gains, and interest.

Adjustments to Gross Income

As the name implies, AGI is gross income minus adjustments. While the IRS refers to these items as "adjustments," they are often confused with tax deductions and operate in much the same way. For example, while it is an adjustment, most people refer to the "student loan interest deduction." Other common adjustments include:

AGI and Taxable Income

After you determine your AGI, you will usually apply the standard deduction or itemized deductions to calculate your taxable income. The amount of the standard deduction is based on your filing status, your age, and whether you are blind. The standard deduction for 2023 is $13,850 for single taxpayers and $27,700 for those who are married filing jointly.

If your deductible expenses are greater than the standard deduction you are allowed, you can use those deductions instead by itemizing. However, it is important to note that filers can only claim the standard deduction or itemize. You can't do both. Common deductions claimed by those who itemize include mortgage interest, state and local taxes, medical expenses exceeding 7.5% of AGI, and donations to tax-exempt organizations. You may be entitled to deduct additional business expenses if you are self-employed.

Your taxable income will be used to find the tax bracket determining your tax rate.

Still Have Questions? Talk to a Tax Lawyer

While it plays a key role in how much tax you pay, calculating your AGI can make tax preparation difficult if your personal or financial situation is complicated. A local tax attorney can help you determine which adjustments will help you reduce your AGI, which should reduce the income tax you owe. A tax lawyer understands tax law and can also ensure your AGI calculations are correct.

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