Adjusted Gross Income Details

Gross income is the total sales price of property or goods, minus the total cost of the property sold and added to any other income from whatever source not limited to cash received. It includes explicit revenue from operating a business, dividends, pensions, and annuities. Gross income includes net gains and profits for disposal of assets, including capital losses and capital gains. Do not deduct losses on personal investments when computing Adjusted Gross Income or Gross Income. Inheritances and private gifts are not included. If you have other personal deductions that are not included on the list, you must deduct them as itemized deductions.

You calculate Adjusted Gross Income by subtracting some deductions, popularly known as ‘above the line deductions’ from the Gross Income. Above-the-line deductions are known as adjustments to income. In the United States tax law, a taxpayer can subtract from their gross income before arriving at the Adjusted Gross Income for the taxable year. These deductions are highly advantageous to the high-income taxpayer compared to the ‘below-the-line deductions,’ subtracted from the Adjusted Gross Income.

The following are examples of above the line deductions:

  • Certain expenses of state officials
  • Specific costs of performing artists
  • Contribution to traditional IRA
  • Individual prices for books and supplies incurred by teachers
  • Certain fees for Army Reserve members
  • Retirement plan savings for the self-employed
  • Alimony payments
  • Interest on student loans
  • Health savings accounts
  • College tuition, fees, and student loan interest
  • Domestic production activities deduction
  • Reforestation expenses, among others.

Example of Adjusted Gross Income

Assuming that your total income is $200,000 and your above-the-line deductions include:

  • 50% of self-employment taxes: $15,000
  • Self-employed health insurance premiums: $12,000
  • Student loan interest: $500
  • Insurance Regulatory Authority (IRA) contributions: $7,000

Summing up the total above-the-line deductions, you will get a total of $34,500. Subtract the adjusted total from $200,000, and your AGI will be $165,500. In the unlikely scenario that you have other personal deductions not included on the list, you must include them in the itemized deductions as you subtract them from your Gross Income. In that case, you must apply the Internal Revenue Service (IRS) Schedule A if they exceed a specified percentage of your AGI.

To find the Adjusted Gross Income, follow the steps below:

  • Suppose you are using software to prepare your tax returns. Your AGI values will be available for you once you’ve keyed in the numbers required. However, if you are doing it manually, begin by tallying your reported annual income. This includes job income as reported by your employer and any other income reported on the 1099 form.
  • State your Gross Income, found on lines 7-22 of form 1040. Add any income from other sources that may be taxed, such as profits and gains received from the sale of a property, social security payments, unemployment compensation, and pensions.
  • Sum up all these to arrive at your total gross income.
  • Subtract your adjustments, also called ‘above the line deductions,’ from your total revenue.
  • The figure you get in the end is your Adjusted Gross Income.

Adjusted Gross Income vs. Net Income

Gross income is the primary starting point of all revenues, the total sum of the money you make in one year. This includes interest income, bonuses, salaries, wages, and capital gains. It is not the money you take home or load into your bank accounts. These are the funds subjected to taxes and other deductions, which reduce the gross income to arrive at the net income or popularly known as the take-home pay.

Adjusted Gross Income is Gross Income minus other specific adjustments as stipulated by the Internal Revenue Service (IRS). AGI is the gross income adjusted through qualified permitted deductions as included in the Internal Revenue Service (IRS) forms. These allowed deductions reduce an individual’s gross income, hence lowering the taxes they will be required to pay. This is not the amount of funds you take home, but rather the amount you subject to the IRS tax.

Net income is the amount of money available at your disposal in your pocket after clearing your taxes and any other deductions as required. Just like any other income, Net Income is calculated from the Gross Income. Ordinary taxes customarily deducted from your Gross Income include medicare tax, social security tax, federal income tax, and state tax. Once deducted from the Gross Income, what remains is what the IRS calls Net Income. While Net Income applies to both businesses and individuals, Adjusted Gross Income is only applicable to individuals.