“What’s your income?”
Sounds like an easy enough question to answer, right? But the truth is, there are a number of different ways to measure income, especially when taxes are concerned.
Adjusted gross income (AGI), modified adjusted gross income (MAGI), taxable income—each of these figures is slightly different, and used for different purposes. Knowing what each is for, and how each is calculated, is crucial so that you don’t make any costly mistakes come tax season.
Of these, your AGI is an especially important number, because it’s the starting point for finding the rest.
Here’s a closer look at what AGI is, how you can calculate it, and how it differs from other measures of income.
What is adjusted gross income?
Your adjusted gross income, or AGI, is income for the year after you subtract amounts—or “adjustments”—that are not taxable. The IRS uses your AGI as a starting point for calculating how much income tax you owe for the year.
It’s important to note that “adjustments,” in the context of AGI, are not the same thing as “deductions.”
Adjustments are made when certain qualified expenses are subtracted from your gross income. You can make these subtractions regardless of whether you itemize your deductions or claim the standard deduction for the year. Deductions, on the other hand, can only be claimed if you choose to itemize.
With this in mind, adjustments are sometimes called above-the-line deductions.
How to calculate AGI
Calculating your AGI is relatively straightforward. To find it, simply subtract any adjustments from your gross income for the year.
1. Calculate your gross income for the year.
The first step toward finding your AGI is to calculate your gross income for the year. Importantly, this doesn’t just mean income that you earn from a job; it includes income you earn from any source. Tally up all the income you’ve earned. Among other things, this may include:
- Salary/wages
- Business income
- Rental income
- Tips
- Capital gains
- Dividends
- Interest payments
- Distributions from a retirement account or pension
- Social Security payments
- Unemployment benefits
- Alimony (if your agreement was made before 2019 and has not been modified)
- Gambling winnings
- Prize awards
2. Calculate your adjustments.
Next, you’ll need to calculate the adjustments that will be subtracted from your gross income. Tally up all of the adjustments that apply to you. Among other things, this may include:
- Contributions to a health savings account (HSA)
- Contributions to a traditional IRA or 401(k)
- Interest paid on student loans
- Alimony payments
- Classroom expenses (if you are an educator)
- Moving expenses related to military duty
- Health insurance premiums (if you are self-employed)
- Some business expenses (if you are self-employed)
- A portion of the self-employment tax (Social Security and Medicare tax)
This may not be a comprehensive list of all possible adjustments that you may be entitled to. Consider working with a tax professional to ensure you are claiming the maximum number of adjustments for your situation.
3. Subtract your adjustments from your gross income.
To find your AGI, simply subtract your adjustments from your gross income. The number that remains is your AGI.
AGI vs. MAGI
Your modified adjusted gross income, or MAGI, is slightly different. It is essentially your AGI with certain adjustments added back to it. For most taxpayers, this will include adding back any qualified tuition expenses, student loan interest deductions, IRA contributions, and a portion of the self-employment tax that you deducted from your gross income, among other subtractions, depending on what the MAGI is being used for.
MAGI is used to determine whether or not you can contribute to a Roth IRA, whether contributions you make to a traditional IRA are tax-deductible, and whether you qualify for or whether you are impacted by a number of other credits or surcharges.
Check out this guide for step-by-step instructions on finding your MAGI.
AGI vs. taxable income
Your taxable income is your AGI minus any deductions (standard or itemized) that you claim for the year. This is the figure the IRS will ultimately use to determine how much income tax you owe.
A hypothetical example
Let's see how this might all fit together:
Why is AGI important?
Your AGI isn’t just a number that’s used to calculate your MAGI and taxable income for the year. It can also affect your financial situation in other ways.
AGI and tax credits
Your AGI is used to determine whether you are eligible to claim certain tax credits that could lower the amount of tax you owe. Some tax credits that have AGI requirements include:
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit
AGI and tax deductions
Your AGI can also influence which deductions you are eligible to claim, as well as the size of these deductions. Some tax deductions that consider your AGI include:
- Charitable contributions
- Medical deduction allowance
Other uses
Finally, it’s important to note that your AGI may be used outside the realm of taxes. Lenders, for example, may consider your AGI before granting you a loan. Likewise, government agencies may consider your AGI to determine whether you qualify to enroll in a program or receive a benefit.
Where to find AGI on your tax forms
Not sure where to find your AGI within different tax forms? Here’s a quick rundown of which tax forms do, and don’t, contain your AGI.
How to find your AGI on your W-2
Unfortunately, your AGI is not contained within your W-2. That’s because your W-2 is simply a statement of income from your employer; it does not take into account other sources of income that you may have. The income reported on a W-2 is simply one element of your AGI.
How to find your AGI on your 1099
A 1099 is a form that reports certain types of income you earn from a non-employer, including interest you earn from savings, dividends you earn from investments, as well as income you receive as an independent contractor. As with your W-2, your AGI will not be listed on Form 1099, but the information contained within any 1099s you receive will be used to calculate your AGI.
How to find your AGI on your 1040
Your AGI can be found on Line 11 toward the bottom of IRS Form 1040, otherwise known as your tax return. This is true whether you file Form 1040, 1040-SR, or 1040-NR.