AGI calculator or adjusted gross income calculator is a tool to estimate your adjusted gross income (AGI), which helps you determine your taxable income and tax bracket. This calculator computes your gross income and subtracts permitted adjustments to arrive at your AGI. The IRS uses your AGI to calculate your taxable income and discover the tax credits and benefits you are qualified to claim.
AGI is also the starting point to figure out your modified adjusted gross income (MAGI), which determines how much you're qualified to contribute each year to your tax-deferred retirement accounts. Here, you will learn the answers to what is AGI, how to calculate AGI, and how AGI impacts your taxable income and tax bracket.
What is AGI?
Adjusted gross income (AGI) is the total or gross income a taxpayer earns minus eligible deductions or adjustments to income, which the IRS allows you to take against this income. These adjustments ensure that you arrive at your actual income before the IRS subtracts the tax deductions and exemptions that provide your taxable income.
Without the AGI, you might have to pay taxes on your gross income, that is, every cent you earn! We all know how scary that thought is. AGI is calculated when individual U.S. taxpayers and households use the IRS form 1040 to calculate and file their yearly taxes.
Uses of AGI
AGI has several uses. The most common uses are to determine:
- How much of your income is taxable;
- Your tax bracket; and
- The credits and exemptions you qualify for, including charitable deductions, deductions for adoption expenses, dependent tax credits, and earned income credit.
To arrive at your AGI, the IRS makes deductions from your gross income. The more deductions are made, the less your taxable income, and the lesser your taxes.
For example, you may be able to deduct unreimbursed medical expenses over 10% of your AGI if you choose to itemize deductions. Hence, if you report a medical expense of
$15,000 not reimbursed by insurance and have an AGI of
$100,000, you will be able to deduct the
$5,000 that exceeds 10% of your AGI (
10% of $100,000 = $10,000). But if your AGI was
$50,000, you will be able to deduct $10,000 from your AGI, which is the amount that exceeds 10% of your AGI (
10% of $50,000 = $5,000). Thus, the lower your AGI, the greater the deduction.
The IRS also uses AGI to prevent taxpayer fraud when you submit your federal tax return electronically. So when you e-file your federal tax return, you will need your AGI to digitally sign and verify your identity or set up a Personal Identification Number (PIN) for your verification.
Since AGI is essentially your gross income minus your adjustments to income, some people refer to it as a net income. But your adjusted gross income is different from net income. While AGI is the 'total taxable income' of an individual, net income refers to the 'total after-tax' income. Net income helps companies determine how efficient they operate, but AGI helps the IRS determine how to process an individual's taxes for the year.
AGI is also the starting point to arrive at your modified adjusted gross income (MAGI). It is generally the AGI with certain excluded income added back. MAGI determines eligibility for other significant tax benefits, including whether you can make tax-deductible contributions to an individual retirement account or contribute to a Roth IRA.
How to calculate AGI?
Before you begin computing your AGI for tax purposes, you may want to find out if you need to file a tax return for the year. Nevertheless, the IRS recommends that you always file your tax return because if you do not owe the government, the government may be owing you, which means you're eligible for a tax refund.
You can calculate your AGI for the year using the following formula:
AGI = gross income – adjustments to income
Gross income – the sum of all the money you earn in a year. Your gross income is a measure that includes all money, property, and the value of services received that the IRS considers 'taxable income.' It specifically consists of the following income sources:
- Salary, wages, and tips;
- Business, self-employment, or Farm income and loss;
- Interest, dividends, and earnings from royalties, partnerships, S corporations, trusts, and license payments;
- Social Security benefits;
- Spousal support and or alimony payments (for divorces finalized before 2019) you receive;
- Capital gains and losses from assets or securities sales;
- Real Estate or Rental income and losses;
- Unemployment compensation and or severance pay;
- Taxable state refunds;
- Pensions, IRA distributions, and annuity payouts;
- Awards, prizes, gambling, lottery, and contest winnings;
- Jury duty fees you earned; and
- Other income not exempted from the income tax.
It's wise to assume all of your income is taxable and report them on your income tax return to be safe. That way, you don't risk any penalty from failing to report your full taxable income. Some income sources are considered non-taxable, and you can safely exclude them. Non-taxable income sources include:
- Gifts and inheritance;
- Cancelled or forgiven debts;
- Child support or foster care payments;
- Disability payments;
- Scholarships or fellowship grants;
- Payment from the sale of your primary home;
- Money from rolling over an IRA or retirement plan; and
- Life insurance proceeds (Unless you receive it for a price).
Adjustments to Income – There are two types of deductions: Above-the-line deductions and Below-the-line deductions. The "line" here is the AGI. Above-the-line deductions are claimed first. The IRS refers to these deductions as 'adjustment to income.' They directly reduce your gross income before any other tax deductions are made on your gross income. These adjustments to income are expenses any taxpayer can claim if it applies to them to arrive at the line or AGI. They are as follows:
- Educator expenses for classroom supplies up to
- Contributions to a traditional IRA, SEP IRA, SIMPLE IRA, and other qualified retirement plans (except to Roth accounts made with after-tax dollars);
- Half of self-employment tax (i.e., the employer portion);
- Healthcare savings account (HSA) contributions (made with after-tax dollars);
- Health insurance premiums for self-employed workers;
- Retirement plan contributions for self-employed workers;
- Alimony paid for divorces finalized before 2019 (included in the recipient's gross income);
- Early withdrawal penalties for savings account by financial institutions;
- School tuition, fees, and student loan interest (for up to
$2,500of the interest you pay on the student loans);
- Moving expenses for active-duty members of the military moving due to military orders;
- Business expenses for fee-basis government officials, teachers, performing artists, and members of the military reserve forces (reservists) who traveled more than 100 miles to perform reserve services;
- Jury duty pay you received and turned over to your employer because they continued to pay you while you served on jury duty;
- Non-taxable portion of medals or prize money won in the Olympics or Paralympics;
- Reforestation expenses and amortization of timber property, up to
- Contributions to the 501(c)(18)(D) employer-funded pension plan;
- Contributions to 403(b) retirement plans by chaplains;
- Attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination against you;
- Attorney fees and court costs paid in connection with helping the IRS detect tax law violations.
- Educator expenses for classroom supplies up to
Each of these deductions has its requirements you must meet to subtract it from your gross income. After you've taken these above-the-line deductions, your final result is your AGI.
You can then claim the below-the-line deductions to determine your taxable income. To do this, the IRS gives two options:
- You can either itemize your deductions, such that you subtract specific types of expenses from your AGI; or
- You can make a standard deduction like everyone else based on your filing status.
Most people choose to itemize their deduction when it's likely to reduce their taxable income more than when they claim the standard deduction. But there are AGI limitations that prevent high-income earners from itemizing their deduction. Thus, the main difference between the above-the-line deductions and the below-the-deductions is when and who can claim them during the tax filing process. You can check out the Modified adjusted gross income (MAGI) calculator to learn how AGI is further 'adjusted' to determine your eligibility for government-subsidized programs.