You must report multiple types of income as long as you earn money. When preparing your tax return, it is important to fully understand the concept of adjusted Gross Income. Many tax rules and privileges are influenced by adjusted gross income.
We will be covering the basis of adjusted gross income in this blog.
What is adjusted gross income?
The adjusted gross income (AGI), or individual gross income, is shorthand for certain deductions. The first step in determining your taxable income is to calculate adjusted gross income.
Individual gross income refers to the total income earned from all sources, including wages, salaries, interest, dividends and so on. Before taxes and other deductions. The adjusted gross income is calculated by adding adjustments, also known as above-the line deductions, to this figure.
Sometimes, adjusted gross income can also be considered a middle point between your gross income or your taxable income. AGI is your total income less certain deductions and expenses. Additional deductions can be subtracted from AGI to get you to your taxable earnings.
The adjustments used to calculate adjusted gross income change each year due to changes in tax laws. Some deductions are consistent year after year. These include retirement plan contributions and student loan interest. Some health insurance premiums can also be deducted. These deductions are shown on the income tax return form.
The adjusted gross income is an important number that determines your tax liabilities, eligibility for tax credits, and exempts you from tax. Some deductions are also limited by the government based on a percentage adjusted gross income. Your adjusted gross income level will impact the amount of deductions. A lower adjusted gross income will usually lead to more deductions and credits.
How to calculate adjusted gross income
On the first page of an individual tax return form, the calculation of adjusted gross is shown. The first step in determining the deductions and credits that you are eligible for and the income tax that you owe is to find your AGI.
Knowing how to calculate your adjusted gross income can help you make your tax preparation process easier.
The following formula is used to calculate adjusted gross income:
- Adjusted Gross Income = Gross income – Adjustments
First, determine your gross income. This is your total income for the year.
You have, for example, earned an annual income from these sources:
$36,000 for your full-time occupation $24,000 to rent out real estate properties $2,500 interest from your savings account
The following can be used to calculate your gross income:
Gross Income = 36,000 + 24,000 + 2,500 = $62,500
You will need to find your gross income. Then, refer to the section “Adjustments To Income”. This section lists all possible adjustments that you can make, also known as “above the line deductions”.
Some common items include:
- Teachers’ expenses such as supplies, are not covered by the teacher
- Business expenses include gas mileage and equipment rental fees
- Moving expenses
- Deductions on savings accounts for health care
- Tuition and fees for college
- Student loan interest
- Contributions to retirement accounts
- For early withdrawals of savings, financial institutions can impose penalties
- Direct payment to the employer of jurors for jury duty
- Alimony payments
You subtract your qualified deductions from your gross income to get your adjusted gross income.
Let’s continue the example. You have earned $62,500 in total income. Additionally, you incurred $500 moving expenses and $2,000 student loan interest.
This will give you your adjusted gross income by subtracting the expenses mentioned above.
AGI = $62,500 – $500 – $2,000 = $60,000
Your adjusted gross income is $60,000
The implications of adjusted gross income
The adjusted gross income is the first and most important factor in determining your individual’s taxable income. To calculate your taxable income, subtract your adjusted gross income from the total of your itemized deductions. To get your taxable income, it is essential to determine your AGI.
Your adjusted gross income has an impact on the deductions and credits that you can take to lower your taxable income.
Let’s look at the impact of adjusted gross income on an individual’s medical and dental expenses. Taxpayers who itemize can only reduce qualified medical and dental expenses that exceed a certain percentage of their adjusted income. You won’t usually be allowed to subtract medical and dental expenses if they don’t exceed 10%.
Adjusted gross income can limit deductions for tuition or charitable contributions. Qualified charitable contributions cannot be deducted if the amount exceeds 50% of your AGI.
Your adjusted gross income will have a major impact on how many deductions and credits you can claim and how much.
We are currently experiencing an unprecedented situation, with major impacts from the COVID-19 pandemic. All over the globe, governments are offering financial assistance programs. The stimulus payment is available to most taxpayers. The amount of the stimulus payment is usually based on your adjusted gross income as a result of your federal tax return.
Bottom line
As we’ve discussed, it is essential to understand the concept of adjusted income. To calculate your adjusted gross income, it is an important step in determining your taxable income.
We hope you’ve gained a better understanding of adjusted gross income and can now prepare your income tax return more efficiently.
