What is Adjusted Gross Income (AGI)?
Adjusted gross income is generally used by the Internal Revenue Service to determine a taxpayer's eligibility for certain tax benefits. AGI is calculated by adding together all qualified income and subtracting all qualified deductions. There are 2 steps involved in arriving at the the AGI.
Step 1: You must first calculate your gross income.
This is the total of all the money you made during the calender year. Some sources of qualified income are income reported on W-2, (including tips), business income, as reported on Schedule C, alimony you receive, unemployment benefits, taxable social security benefits, income on rental property, royalties, money distributed from retirement accounts, taxable refunds, taxable interest, dividends and capital gains from securities sold at a profit. The sum of all of the qualified income results in your gross income. But, the total Gross Earnings total does not include personal 401k contributions, or any portion of company's matching 401k contributions.
Step 2: Calculate your qualified deductions
Qualified deductions include moving expenses, alimony you pay to others, early withdraw penalties on savings accounts, educator expenses, 50 percent of self employment tax, health insurance premiums for the self employed, interest on student loans, qualified tuition and fees paid by students, and qualified Individual Retirement Accounts contributions.
Now, the to find your adjusted gross income, subtract qualified deductions from your gross income. Thus, the AGI is the amount of total qualified gross income less qualified deductions (sometimes known as above the line expense).