Everything You Need To Know about AGI

Feb 10, 2024

You likely pay more consideration to your taxable income than you do to your adjusted gross income while preparing your tax returns. However, your adjusted gross income is also important to consider since it may directly influence the deductions and credits you are qualified for, which can result in a reduction in the amount of taxable income you declare on your tax return.

Identifying and Using AGI

Adjusted gross income is a modification of gross income under the United States tax code. Before taxes or other modifications, a person's gross income is simply the whole amount of money they receive in a particular year. A wide range of income sources might be included in this category: dividends and capital gains; interest income; licensing; rental income; alimony; and pension distribution payments. Your tax burden is calculated using several different modifications to your total income. Several states also utilize the AGI from federal tax returns in the United States to estimate the amount of state income taxes that persons owe. States can impose extra state-specific deductions and credits on this amount. When calculating your adjusted gross income, you must deduct certain expenses from your gross income, which you must include on Schedule 1 of your tax return.

How to Calculate Your AGI

If you use a computer to prepare your tax return, the program will compute your adjusted gross income after you have entered your figures. The first step in calculating it yourself is to add up all of your reported income for the year in question. This category includes work income, which is reported to the IRS by your employer on a W-2 form, and other types of income, such as dividends and miscellaneous income, which are reported to the IRS on 1099 forms. You then include any taxable income from other sources, such as a profit from the sale of a property, unemployment benefits, pensions, Social Security payments, or anything else that hasn't previously been reported to the Internal Revenue Service (IRS). Many of these items of income are also included on IRS Schedule 1.5, which is available online.

To calculate your reported income, deduct the relevant changes to the income stated above from your reported income in the next step: Your AGI is the outcome of this calculation. Take your adjusted gross income (AGI) and subtract either standard deductions or the amount of your itemized deductions to arrive at your taxable income. In the majority of circumstances, you have the option to choose the option that provides you with the most advantage. For example, the standard deductions for a married couple filing jointly in 2021 is $25,100, and in 2022 it is $25,900. Couples with itemized deductions over that amount would normally choose to itemize rather than take the standard deductions, while others would accept the standard deductions.

On its website, the Internal Revenue Service (IRS) offers a list of itemized deductions and the conditions for claiming them. Your AGI also has an impact on your eligibility for several tax deductions and credits that are available to you when filing your tax return. In general, the smaller your adjusted gross income (AGI), the greater the number of deductions and credits you will be qualified to claim, and the greater the amount of money you will be able to save on your tax bill.

Special Considerations

Your adjusted gross income (AGI) is reported on line 11 of IRS Form 1040, which is the form that you use to submit your income tax returns for the calendar year. Keep that number handy after you've finished your taxes since you'll need it again if you elect to submit your taxes electronically the following year. It is used by the Internal Revenue Service to authenticate your identity. Another point to consider: starting in January 2022, practically everyone may utilize the IRS Free File program to file their federal (and, in certain situations, state) taxes online and without paying a single cent in fees.

IRAs, both traditional and Roth, offer the opportunity for tax-free investment growth. This leaves you with more money to allow it to compound and grow for years and decades until you require it. Taxes are due whenever you sell investments for more than they were originally purchased for or when you receive dividend payments in a traditional investment account.

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