Your Adjusted Gross Income (AGI) is your actual income minus any adjustments that you qualify for. While your adjusted gross income is different than your taxable income, both can have an impact on the amount of tax that you owe and whether or not you’ll get a tax refund.
In this guide, we’ll look at the factors that determine your AGI. And we’ll also explain the various ways that your AGI could affect your taxes this year. Here’s what you need to know.
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Table of Contents:
What Factors Affect Your Adjusted Gross Income?
There are two main factors that affect your AGI: your gross income and your adjustments to income. According to the IRS, here are a few of the income sources that are included in your gross income:
- Capital gains
- Business income
- Retirement distributions
And here is a quick list of the various items that could cause an adjustment to your gross income:
- Education expenses (including tuition and fees)
- Student loan interest
- Alimony payments
- Contributions to a retirement account
- 50% of the self-employment taxes you paid
- Health Savings Account (HSA) contributions
- Various business expenses
Your Adjusted Gross Income will never be higher than your gross income. But it can be lower if you qualify for any of the adjustments listed above.
How to Calculate Your Adjusted Gross Income
To calculate your AGI, you’ll first need to collect all of your income statements. If you work for a W-2 employer and don’t have many investments in taxable accounts, this step probably won’t take long.
However, if you’re self-employed or have a lot of taxable investments, this step will take a bit longer because you may have several 1099 forms to track down. Once you’ve located all of your income forms, add them together to find your gross income for the year.
Next, you’ll subtract your eligible adjustments from your gross income. If you’re filling out a paper return and you qualify for income adjustments, you’ll probably need to fill out a Schedule 1. However, if you use online tax software, they’ll typically handle this for you automatically.
Once you’ve subtracted all your adjustments, you’ve now calculated your adjusted gross income. Later, you’ll need to decide whether to itemize your deductions or take the standard deduction. Either way, you’ll subtract that deduction amount from your AGI to determine your taxable income.
How Your AGI Can Affect Your Deductions and Credits
AGI adjustments are often called “above-the-line” deductions. In other words, they are deductions that everyone can qualify regardless of whether they choose the standard deduction or itemized deduction method.
“Below-the-line” deductions, on the other hand, are only available to tax filers who choose to itemize. Because AGI adjustments are essentially “taken off the top,” they can have an effect on the deductions and credits that you qualify for.
For example, if you itemize deductions, the IRS allows you to deduct any medical expenses that exceed 7.5% of your adjusted gross income. With a $40,000 AGI, that means you can deduct any medical expenses exceeding $3,000. However, with an $80,000 AGI, you can’t deduct any medical costs until the total annual expenses exceed $6,000.
Finally, it should be noted that if you live in a state that requires its own separate return, your AGI will typically be the starting point for calculating your state taxes too.
What is Modified Adjusted Gross Income (MAGI)?
Your Modified Adjusted Gross Income (MAGI) is another income level that can have an impact on the tax breaks or deductions that you qualify for. Your MAGI is calculated by taking your AGI and then adding back certain deductions.
Your AGI and MAGI will usually be close to each other. And, in some cases, you may not need to know your MAGI. But there are a few tax situations that are directly related to your MAGI.
For instance, if you want to contribute to a Roth IRA, your MAGI must be below certain limits. And your MAGI also determines whether or not you can deduct your Traditional IRA contributions. Below, are a few more tax situations that are impacted by your modified adjusted gross income:
- Adoption credit: For tax year 2019, if your MAGI amount is $211,160, you can earn the full credit. Above that level, your credit will begin to phase out, until your MAGI amount reaches $251,160 (at which point your credit drops to zero).
- American Opportunity Tax Credit: To qualify, your MAGI must be $80,000 or below for individuals ($160,000 or below if you’re married filing jointly). Learn more about tax credits and deductions for a college education.
- Child Tax Credit: The credit begins to phase out once your MAGI income level rises above $200,000 per year (or $400,000 for married filing jointly filers).
- Premium tax credits: Your MAGI determines your eligibility for these refundable tax credits which can help cover your health insurance premiums.
- Net Investment Income Tax: If your investment income exceeds certain threshold amounts, you may be required to pay the Net Investment Income Tax. And, if so, your MAGI can play a role in determining how much of your income is subject to this 3.8% tax.
The specific deductions that you’ll need to add back when calculating your AGI will vary depending on the situation. For example, if you’re trying to qualify for the American Opportunity Credit, you’ll need to add back the following deductions to your AGI:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Exclusion of income for residents of Puerto Rico or American Samoa
But when calculating your MAGI for the purposes of qualifying for premium tax credits, non-taxable Social Security benefits and tax-exempt interest are taken into account. In each situation, the form instructions will detail which AGI deductions need to be added back for calculating your MAGI.
Your adjusted gross income is one of the most important income levels for you to determine when you’re filing your taxes. Because AGI adjustments are “above the line,” they can have a big impact on the deductions and credits that you qualify for this year.
And there’s another reason why your AGI is important. If you plan to prepare your own taxes or e-file, you’ll need to know your AGI from last year’s return in order to validate your identity. If you use tax software, they’ll usually enter your prior year’s AGI for you automatically.