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What Is An Adjusted Gross Income
Adjusted gross income refers to a taxpayer’s gross income minus any eligible adjustments authorized under the tax laws.
Gross income includes things like a person’s income, wages, dividend revenue, capital gains, self-employment income, retirement distribution, interest income, or other types of income.
The adjustments to the gross income include things like student loan interest, educator expenses, alimony payments, or contributions to a retirement account.
In most cases, a taxpayer’s adjusted gross income will be lower than the gross income figure.
The adjusted gross income is calculated by the Internal Revenue Service to calculate how much a taxpayer will need to pay in taxes.
It is also used to determine how much a taxpayer may be entitled to tax credits or various other types of tax deductions.
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Why Is The Adjusted Gross Income Important
Determining your adjusted gross income is important for tax purposes.
The main reason why you must calculate your adjusted gross income is to determine how much you must pay in taxes.
In essence, the adjusted gross income represents the starting point for determining your tax obligations to the IRS.
Once your adjusted gross income is determined, your tax liability may be calculated either on this figure or you may be entitled to make further tax deductions.
The lower your adjusted gross income, your tax bill will be lower.
When you file your income tax return, you’ll notice that the term “adjusted gross income” or “AGI” is used throughout.
This is because this figure helps calculate your taxable income.
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Where To Find Adjusted Gross Income
There are many ways you can find your adjusted gross income on your tax documents.
Here are some places you can look to find your adjusted gross income:
- On Line 11 of your 2021 Form 1040
- On Line 11 of your 2020 Form 1040 and Form 1040-SR
- On Line 11 of your 2020 Form 1040NR
- On Line 8b of your 2019 Form 1040 and Form 1040-SR
- One Line 7 of your 2018 Form 1040
Here is where you would look on the 2021 1040 Form:
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How To Calculate Adjusted Gross Income
Calculating your adjusted gross income is fundamentally pretty simple.
You need to add up all the income you’ve earned during a given year and then subtract all the eligible adjustments to get your adjusted gross income.
The adjusted gross income formula can be presented as follows:
AGI = Gross Income – Income Adjustments
Gross income can include elements like employment income, investment income, pension income, business income, rental revenue, dividend income, interest income, unemployment income, capital gains, or any other types of income earned in a given year.
Income adjustments can include elements like educator expenses, HSA contributions, military moving expenses, self-employment taxes, retirement plan contributions, alimony payments, IRS contributions, student loan interest, deductible tuition and fees, and up to $600 of charitable contributions.
It’s important that you carefully identify all your income and validate the proper adjustments in consideration of your specific circumstances.
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How To Reduce Adjusted Gross Income
There are several ways you can reduce your adjusted gross income to ultimately reduce your tax liability.
The first method is to contribute to your Health Savings Account.
Contributing to an eligible health savings plan allows you to deduct up to $3,650 for yourself and up to $7,300 for your family coverage.
Another way you can reduce your adjusted gross income is to contribute to your retirement savings accounts.
For instance, when you contribute to a traditional individual retirement savings account, you can reduce your adjusted gross income on a dollar-for-dollar basis.
There’s a total maximum deduction allowed which is $6,000 for most taxpayers and $7,000 for those over 50 years of age.
If you have paid student loan interest during the year, you can use the amount paid to reduce your adjusted gross income.
To maximum you can claim in student loan deduction is $2,500.
Another way is to deduct educator expenses.
Educators incur different expenses during a school year and the tax laws are designed in such a way allowing them to deduct their out-of-pocket expenses.
Educators can deduct up to $300 from their gross income.
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Adjusted Gross Income vs Taxable Income
Adjusted gross income is the amount that you get once you take your gross income and make some deductions.
For employees, your gross income will appear on your W2 form as the total amount of wages you received in a year.
If you had other income in the year, like dividend income, investment income, interest income, rental revenue, or others, you’ll add it to your W2 total income.
Once your gross income is calculated, you will then make certain deductions such as educator expenses, student loan interest, and other deductions.
The result is your adjusted gross income.
Now, taxable income is the figure you get once you take your adjusted gross income and you deduct either standard deductions or itemized deductions and qualified business income deductions.
This means that you must use your adjusted gross income to calculate your taxable income after you claim standard deductions or itemized deductions.
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Takeaways
So there you have it folks!
What does “adjusted gross income” mean?
In a nutshell, from a tax point of view, the adjusted gross income is gross income minus certain adjustments certain eligible adjustments.
The adjusted gross income allows you to determine your taxable income and help you determine the impact of various tax deductions and credits that you can take.
The more you are able to take advantage of tax credits and make tax deductions, the lower your taxable income will be, and the lower your tax liability.
It’s important that you properly calculate your adjusted gross income in consideration of your specific tax circumstances so you comply with the tax laws.
Now that you know what an adjusted gross income is all about and how it works, good luck with your research!
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