Understanding AGI and How to Calculate it

What's adjusted gross income? Here's what to know about this important income tax calculation.

WHEN IT COMES TO filing income taxes, it's essential to understand your adjusted gross income, or AGI, and its relationship to certain tax benefits.
"The reason it matters is because a lot of deductions, tax credits, whether or not you can contribute to certain retirement accounts depends on your AGI," says Michele Cagan, certified public accountant and author of "Debt 101." "A lot hangs on it."

In fact, recently, Americans' eligibility for COVID-19 stimulus checks was tied to adjusted gross income reported in 2018 or 2019. The final amount taxpayers receive will depend on their 2020 AGI.

Ready to understand this essential tax concept? Here's what to know about AGI, how it's calculated and strategies to reduce your adjusted gross income.

What Is Adjusted Gross Income, or AGI?

AGI is a calculation of income for tax purposes that measures taxable earnings while subtracting certain tax deductions. For 2020 income taxes, it's marked on line 11 of your Form 1040, according to IRS draft forms.

"Basically it's all of your income minus certain adjustments that are found on Schedule 1," says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com.

Why Is AGI Important?

Your adjusted gross income is an important tax calculation because eligibility for many tax deductions, tax credits and other tax breaks are tied to it, Cagan says. "It can lock you out of tax benefits if your AGI is too high," she says.

For example, your AGI impacts limitations on these itemized deductions:

• Charitable contributions. Donors can deduct qualified cash gifts up to 100% of AGI for 2020, an increase from previous years, thanks to the coronavirus stimulus bill.
• Medical expenses. Limited to expenses above 7.5% of AGI.
• Casualty losses. Limited to expenses above 10% of AGI.

It will also determine your eligibility for and amount received in certain tax credits, including the earned income credit and retirement savings contribution credit.

Recently, the stimulus checks designed to combat the coronavirus' economic repercussions was tied to AGI. The full $1,200 per taxpayer is available to single filers earning less than $75,000 in adjusted gross income and married filers earning less than $150,000 in 2020. Reduced amounts are available to taxpayers earning an adjusted gross income of less than $99,000 if single or $198,000 if married filing jointly.

How Do I Calculate AGI?

AGI is calculated this way:

All income
- exclusions from income
= gross income
- deductions for AGI
= adjusted gross income

On a practical note, most tax software programs will take you through the steps to calculate adjusted gross income within their interfaces. A tax professional can also help you calculate this number.

Here are the elements of the calculation in more detail.

All income. To determine this, collect income statements from all sources, including businesses, unemployment compensation, insurance, wages, investments, gifts and other sources.

Exclusions from income. Certain types of income are excluded from gross income for the purposes of calculating adjusted gross income. Depending on the circumstances, those could include these sources of income:

• Gifts and inheritances.
• Scholarships.
• Life insurance benefits.
• Employer-provided benefits.
• Certain investment-related income such as the interest on state and local government obligations.

If you're not sure whether an income source is excluded, consult with a tax professional.

Deductions for AGI. To calculate adjusted gross income, you'll be able to subtract certain above-the-line deductions from gross income. Those deductions include:

• Capital losses.
• Contributions to a health savings account.
• Interest on student loans.
• IRA contributions.
• Certain expenses for self-employed individuals.
• Alimony for divorces finalized before Dec. 31, 2019.

Additionally, taxpayers who don't itemize may deduct $300 in cash donations to charity. This is due to the coronavirus stimulus bill and new for 2020 taxes.

Keep in mind that some of these deductions are capped at a certain level. Subtracting them will yield your AGI. It's simple math, although identifying the appropriate income sources and deductions may be less simple.

How Do I Reduce AGI?

A key tax-planning strategy is to reduce adjusted gross income to make the taxpayer eligible for more generous tax benefits. Most of those strategies are best enacted before Dec. 31, Rosenberg says. "If you're looking at AGI, and it's starting to make you ineligible for some things, it's important to do the planning before the end of the year," she says.

For example, you may want to generate investment losses by selling off stocks or securities at a loss to reduce your AGI, she says. Or you could consider making a contribution to your IRA or self-employed retirement plan. Contribute to your health savings account if you're eligible or consider taking the deduction for tuition and fees interest.

"Every little bit makes a difference when you're trying to reduce AGI," Cagan says.

What's the Difference Between AGI and Modified Adjusted Gross Income, or MAGI?

Don't confuse AGI with modified AGI. To calculate your eligibility for certain tax benefits, such as the deduction associated with contributions to an IRA, modified adjusted gross income may be used.

Rosenberg says that different credits and deductions require different calculations for modified AGI. "Sometimes modified adjusted gross income might not include certain deductions," she says. "Sometimes it may include nontaxable income, so there are different elements."

Take note of whether a tax benefit you're eyeing is tied to AGI or MAGI. If it's tied to MAGI, you may have to do some extra math to determine your eligibility. It is entirely possible, however, that depending your financial situation, your AGI and MAGI will be the same since some of these deductions and forms of income are uncommon.

Credit given to US News & World Report published on Sept 17, 2020 by Susannah Snider

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