By Megan Doyle | American Express Credit Intel Freelance Contributor
7 Min Read | January 24, 2021 in Money
The concept of “income” seems pretty simple on the surface. It’s the money you earn from work, savings interest, investments, and so on. But if you’ve ever found yourself scratching your head during tax season, wondering what your “adjusted gross income” is and how it relates to your gross income and taxable income, you’re not alone.
Adjusted gross income (AGI) is a crucial component of taxes. It’s the basis for determining your total tax bill, and plays a key role in determining which tax credits and deductions you’re eligible for. Thoroughly understanding what AGI is, how it’s used, and how to calculate it might help you lower your taxable income, thereby reducing your taxes – and saving you money.
AGI is defined as your gross income minus whichever tax adjustments you qualify for (AGI = gross income - any eligible tax adjustments). When filing your taxes, your AGI is used to determine your taxable income. Let’s break that down piece by piece:
There are several important ways your AGI is used:
When it comes to below-the-line deductions, you might be aware that you can lower your taxable income – and therefore, the taxes you owe – by taking the standard deduction or itemizing your deductions, depending on your specific tax circumstances. But you may also be able to lower your tax bill thanks to the above-the-line tax adjustments used to calculate your AGI.
There are at least 10 above-the-line AGI adjustments, but most people only qualify for a few.3 Some of the more common adjustments taxpayers use to lower their AGI include:
In general, the lower your AGI, the greater the chance you’ll qualify for tax credits and certain itemized deductions.
It’s important to note that requirements for many below-the-line adjustments, tax credits, and itemized deductions can be very specific and are subject to income thresholds. This means that tax benefits might be reduced or limited if your AGI or MAGI (depending on the tax benefit) is above a certain level. For example:
Requirements are also subject to change each year, so be on the lookout for new laws before filing your taxes.
Most tax software will calculate your AGI for you, and the IRS suggests taxpayers consider filing electronically because it’s fast and accurate.7 But it’s usually better to understand what it’s doing. For the 2020 tax season, here’s what you’ll need:
To calculate your AGI, refer to the accompanying excerpt of Form 1040 for the 2020 tax year (below) and follow these instructions:
Your AGI will never be more than your total income, and it’s not uncommon for your AGI and total income to be the same.
Take note: When filling out your 1040, some types of additional income and adjustments to income require that you fill out and attach additional forms and schedules. These help you correctly calculate income and adjustments. For more information, see the IRS instructions for Form 1040.
Your adjusted gross income is your gross income minus certain above-the-line tax adjustments. These adjustments effectively lower your taxable income and increase your chances of qualifying for certain tax breaks. If you’re eligible, taking advantage of above-the-line tax adjustments can help you save money by lowering your tax bill.
1 “Form 1040,” IRS
3 “26 U.S. Code § 62. Adjusted gross income defined,” Cornell Law School
4 Form 1040, IRS