With all the different terms for types of income on your tax returns, it can be difficult to know what each one means. However, it is important to know how to calculate your adjusted gross income, or AGI, because it determines your eligibility for several tax deductions, including the medical expenses deduction and the miscellaneous expenses deduction.
Total Taxable Income
Your total taxable income includes all income that isn't exempt from income taxes. This includes both wage and net self-employment income. It also includes rental income, investment income, interest income and the taxable portion of any Social Security income.
Adjustments to Income
Adjustments to income, sometimes called above-the-line deductions, are also figured when calculating your adjusted gross income. Common adjustments include deductible contributions to IRAs, alimony paid, moving expenses, student loan interest and the tuition and fees deduction. The bad debt deduction, educator expense deduction and a health savings account also qualify. In addition, if you're self-employed, the deduction for health insurance, qualified retirement plan contributions and the employer portion of self-employment taxes also count as adjustments to income.
Figuring your adjusted gross income requires subtracting your adjustments to income from your total income for the year. For example, suppose you earned $50,000 in salary and $2,000 in interest income, making your total income $52,000. If you contributed $3,000 to your traditional IRA and paid $1,500 in student loan interest, that equals $4,500 worth of adjustments. Therefore, you would subtract $4,500 from $52,000 to get an AGI of $47,500.
A number items can reduce your taxes but don't change your adjusted gross income. For example, the standard deduction doesn't get subtracted when figuring your adjusted gross income. Neither do itemized deductions. Your adjusted gross income doesn't count your personal exemptions, either. So if you're claiming multiple dependents, your taxable income will be significantly lower than your adjusted gross income. Finally, any tax credits you are eligible for aren't figured in until after you've figured your taxes due.
- Internal Revenue Service: Definition of Adjusted Gross Income
- Internal Revenue Service: Topic 450 - Adjustments to Income
- Internal Revenue Service: Form 1040
- Internal Revenue Service: A Comparison of Income Concepts: IRS Statistics of Income, Census Current Population Survey, and BLS Consumer Expenditure Survey
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