Adjusted Gross Income (AGI) is a term used in the U.S. federal income tax system and it represents an individual’s total gross income minus certain adjustments or deductions. AGI is used to determine a taxpayer’s liability for income taxes and is also used to determine eligibility for certain tax credits and deductions.
Gross income is the total amount of money an individual earns from all sources before any deductions are made. This includes wages, salaries, tips, self-employment income, interest, dividends, capital gains, rental income, and other forms of income.
Adjustments or deductions are certain expenses that are allowed to be subtracted from gross income to arrive at AGI. These include:
- Contributions to certain retirement accounts, such as a traditional IRA or 401(k)
- Certain business expenses for self-employed individuals
- Certain education expenses
- Certain moving expenses
- Alimony payments
AGI is important because it is used as the starting point for calculating an individual’s taxable income and tax liability. Taxable income is AGI minus certain deductions and exemptions. The tax rate applied to an individual’s taxable income will depend on their AGI and the tax bracket they fall under.
Knowing your AGI is important because it helps you to understand your tax liability and to plan your finances accordingly. It is also necessary when you are applying for certain benefits such as student loan interest deduction or for determining whether you qualify for certain tax credits.