Adjusted Gross Income (AGI)
Definition
Adjusted Gross Income (AGI) is your total gross income minus specific deductions, used as the starting point for calculating your tax liability.
Explanation
AGI is calculated by taking your total gross income (wages, dividends, capital gains, business income, etc.) and subtracting specific adjustments known as above-the-line deductions. These include contributions to traditional IRAs, student loan interest paid, HSA contributions, self-employment tax (half), and alimony paid (for pre-2019 agreements).
AGI is important because it determines eligibility for many tax deductions and credits, including the Roth IRA contribution limit, medical expense deductions, and the Child Tax Credit. Your AGI appears on line 11 of Form 1040. Modified Adjusted Gross Income (MAGI) is AGI with certain amounts added back for specific tax calculations.
Example
You earn $65,000 in wages and $2,000 in dividends. You contribute $3,000 to a traditional IRA and pay $900 in student loan interest. Your AGI = $67,000 − $3,900 = $63,100.
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