One of the first steps in calculating your taxable income is calculating adjusted gross income (AGI). You can calculate your tax due for the year once you’ve determined your adjusted gross income. This article will teach you how to calculate your adjusted gross income (AGI). However, you can decide if you need to file a tax return for the year before calculating your AGI. The Internal Revenue Service (IRS) gives an interactive tax assistant. It helps to decide if you need to file a tax return for the year. Even if you are not required to submit a tax return, the IRS advises that you do so. You might be eligible for a tax return or certain credits if you paid income tax. This article will explain AGI and explain how to calculate it.

What exactly is adjusted gross income?

Your AGI is your gross income minus deductions and adjustments. Calculating your AGI may show how much of your income is taxable after specific deductions. Your AGI is one of the most critical parts of a tax return because it helps the IRS calculate how much tax you owe. You can report AGI on IRS Form 1040. Your AGI determines the benefits, tax credits, deductions, and social programs. For example, you may be eligible to deduct unreimbursed medical expenditures if they exceed 7.5% of your AGI.

Uses of AGI:

AGI has a variety of uses, and we can also find it on the check stub maker. The most significant uses are to determine the following:

• How much of your income is taxable?
• Your tax bracket.
• The credits and exemptions you qualify for include charitable deductions, dependent tax credits, and earned income credits.
• The IRS deducts from your gross income to calculate your AGI. The more deductions and expenses you include, your taxable income and taxes are lower.
• When you file your federal tax return using the internet, the IRS utilizes AGI to avoid taxpayer fraud. When you e-file your federal tax return, you’ll need your AGI to sign and confirm your identity. You must create a Personal Identification Number (PIN) for verification.
• AGI is also used to calculate your modified adjusted gross income (MAGI). It is the AGI plus some excluded income. MAGI determines eligibility for further significant tax breaks. It decides whether you may make tax-deductible contributions to an individual retirement account or a Roth IRA.

How to calculate adjusted gross income?

Before calculating your AGI for tax reasons, you should determine if you must submit a tax return for the year. The IRS advises that you always submit your tax return. It is because even if you do not owe the government anything, it may owe you tax refunds. Apart from this, you can even record your biweekly pay for better record keeping.

AGI = total gross income – adjustments to income

Gross income –

The total amount of money you make or earn in a year. According to the IRS, your gross income is the total of all money, property, and the value of services received that are taxable. These income sources are as follows:

• Salary, wages, and tips
• Business, self-employment, or income and loss
• Interest, dividends, and earnings from royalties, S corporations, trusts, and license payments
• Social Security benefits
• Spousal support and or alimony payments you receive (for divorces finalized before 2019);
• Capital gains and losses from asset or securities sales
• Unemployment compensation and or severance pay
• Taxable state refunds
• Pensions, IRA distributions, and annuity payouts
• Awards, prizes, lottery, and contest winnings
• Jury duty fees you earned
• other income that isn’t exempted from the income tax.

To be safe, assume all your income is taxable and disclose it on your income tax return. You won’t face any penalties if you don’t declare your whole taxable income. Moreover, specific sources of income are non-taxable, and you can ignore them. Non-taxable sources of income include:

Adjustments to Income –

There are two sorts of deductions: above-the-line and below-the-line. The AGI is the “line” in this case. Deductions over the line are claimed first. These deductions are ‘adjustments to income’ by the IRS. They cut your gross income straight before any other tax deduction. These income adjustments are costs that any taxpayer can claim if they apply to the line or AGI. These would be:

• Educator expenses for classroom supply up to $250
• Contributions to a traditional IRA, SEP IRA, SIMPLE IRA, and other retirement plans except for Roth accounts
• Half of the self-employment tax (employer part)
• Healthcare savings account (HSA) contributions
• Health insurance premiums for self-employed workers
• Retirement plan contributions for self-employed workers
• Alimony paid for divorces finalized before 2019
• Early withdrawal penalties for a savings account by financial institutions
• School tuition and student loan interest (for up to $2,500 of the interest you pay)
• Moving expenses for active-duty members of the military who are moving due to military orders;
• Business expenditures for fee-based government officials. Instructors and military reserve forces who went more than 100 kilometers to conduct reserve duties;
• Jury duty salary you received and gave up to your employer because they continued to pay you while you were on jury duty
• Non-taxable component of Olympic or Paralympic medals or prize money
• Reforestation expenses of timber property, up to $10,000
• Contributions to the 501(c)(18)(D) employer-funded pension plan
• Contributions to 403(b) retirement plans by the chaplain
• Attorney fees and court cost to recover a judgment for a claim of unlawful discrimination against you.
• Attorney fees and court costs are paid in connection with helping the IRS detect tax law violations.

Criteria of deduction: 

Each of these deductions has specific criteria you must complete deducting from your gross income. When you’ve taken these above-the-line deductions, your AGI is the result. Then you may use the below-the-line deductions to calculate your taxable income. The IRS provides two alternatives for doing so.

• You may either itemize your deductions so that you reduce specific categories of costs from your AGI,
• Like everyone else, you can take a standard deduction depending on your filing status.

Itemizing the deductions is more likely to cut the taxable income than taking the standard deduction. AGI limits prevent high-income people from itemizing their deductions. The fundamental distinction between above-the-line and below-the-line deductions is who can claim them and when.

Conclusion:

Knowing about retirement benefits, debt, and healthcare can determine adjusted gross income. A salaried employee and a company professional need AGI calculation to keep track of their taxes. Planning for your tax deductions can help you cut your taxable income and enhance your take-home pay at the end of the fiscal year.