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What Is Adjusted Gross Income?

A taxpayer's gross income is the sum of all of the taxpayer's income from all sources, minus limited items that are exempt from taxation. Once a taxpayer has calculated their gross income, they can "adjust" the income, as with some self-employment costs, charitable contributions, and education tuition. The figure that results from these removals, or “adjustments," is the taxpayer's “adjusted gross income."

The list of income sources that taxpayers can remove from gross income to arrive at their adjusted gross income is contained in the United States Tax Code at 26 U.S.C. section 62. It includes such things as business deductions, specific expenses of military reservists, and certain teacher expenses.

Gross Income vs. Adjusted Gross Income

Why does the government distinguish between gross income and adjusted gross income (AGI)? As with all things related to the tax code, the answer is complicated. The federal government uses AGI to determine eligibility for certain programs and tax deductions.

The government has determined that gross income alone is not a clear indicator of what programs and deductions should be available for a taxpayer. This allows the taxpayer to remove some types of income from their gross income before determining if their AGI is enough to qualify for certain programs. For example, if your AGI is over a certain amount, you may not be eligible for deductions that are intended to help people with lower income levels.

Common Tax Adjustments

Some taxpayers will be able to subtract multiple adjustments from their gross income, while others may not be eligible for any adjustments. Some of the common allowable taxpayer adjustments to determine AGI include:

  • Health savings account (HSA) deductions
  • Charitable contributions
  • Education expenses
  • Educator expenses
  • Moving Expenses

Adjusted Gross Income vs. Taxable Income

Adjusted gross income is not the same as taxable income. A taxpayer starts with calculating their gross income, or their combined income from all sources. First, allowable adjustments are taken away, which leads to the AGI. Then, the taxpayer can take deductions and exemptions to come to their taxable income.

After you get your AGI, you can generally take a standard deduction or itemized deduction. The standard deduction is based on your filing status and single or joint filings. The standard deduction for tax year 2021, for example, is $12,550 for single taxpayers and $25,100 for married filing jointly.

Some taxpayers benefit from itemizing their deductions, including taxpayers who have a lot of out-of-pocket medical expenses, gambling losses, or property damage. Talk to your tax advisor or a tax attorney if you have questions about your taxable income.

Adjusted Gross Income Legal Help

Tax regulations can be complicated. If you have legal questions about your AGI, gross income, or taxable income, a tax attorney can give you advice to help you avoid tax penalties and maximize your tax savings. Find a tax attorney in your area for advice.

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