What Is Adjusted Gross Income?
It’s that time of year when you hear tax terms being tossed around, whether on the news, at work by the HR Department, or over coffee with friends. But what exactly do all these terms mean? A commonly used term is Adjusted Gross Income or AGI. What is AGI, and how do you calculate it?
Your adjusted gross income is the amount of money you earned minus all allowable adjustments. You want this number to be as low as possible. Once you know your AGI, you’ll subtract either the itemized deduction amount or the standard deduction amount. The resulting number will be used to calculate the amount of tax you owe. The lower your AGI, the lower the amount of taxes you need to pay.
How to Calculate Your Adjusted Gross Income
Step 1: Calculate Your Income for the Year
This includes your salary, of course. It could be from Social Security, IRAs, or pensions. Don’t forget any business income you’ve earned or money from a side hustle. Include alimony and unemployment in this calculation.
Step 2: Add Up All Allowable Adjustments
Here is where you want to find as many as possible. Remember, the lower you get your income, the less tax you have to pay. Schedule 1 of Form 1040 has a comprehensive list of all the adjustments available. The adjustments are:
- Educator expenses
- Certain business expenses
- Health Savings Account deduction
- Moving expenses for members of the Armed Forces
- Deductible part of self-employment tax
- Self-employment SEP, SIMPLE, and qualified plans
- Self-employment health insurance deduction
- Penalty on early withdrawal of savings
- Alimony paid
- IRA deduction
- Student loan interest
- Tuition and fees deduction
Some of these deductions require additional documentation or forms. They will also be available on the IRS website.
Step 3: Subtract Total Adjustments From Total Income
Congratulations! You have just calculated your Adjusted Gross Income.
There is a lot of software available to you to complete your taxes. The IRS offers free tax software called Free File to anyone who has an AGI less than $72,000. The program will guide you through the forms by asking you a series of questions. Read more about options for filing your taxes for free.
Preparing your taxes or even talking about taxes can be intimidating. But knowing a couple of terms can lessen that fear. At SaverLife, we’re here to answer your questions and help you through the process.