The amount of money you made last year does not automatically equal your taxable income. When filing your taxes, you must first deduct certain expenses called itemized deductions from your gross income in order to determine your taxable income, otherwise known as adjusted gross income or AGI.
If you fall within the 22-percent tax bracket, for example, you do not pay 22 percent of your gross income, but rather 22 percent of your adjusted gross income.
Everyone has an adjusted gross income thanks to the standard deduction, even without any qualifying itemized deductions.
Itemized deductions represent the "adjustments" made to your gross income. Form 1040 Schedule A helps you list the most common itemized deductions: unreimbursed medical and dental expenses, taxes paid, interest paid on your mortgage, gifts made to charity, casualty and theft losses, unreimbursed job expenses, tax preparation fees and investment or safe deposit box fees.
The total itemized deductions must reach a minimum threshold in order to be worthwhile. If your itemized deductions fall below this amount, you can take a standard deduction.
Standard deductions depend on your filing status: for individuals, the standard deduction is $12,000; for the head of the household, it is $18,000; and for married couples, it is $24,000.
For example, if you file as an individual and your itemized deductions fall below $12,000, you can take the standard deduction. However, if your itemized deductions exceed $12,000, you can bypass the standard deduction and claim all of those itemized deductions for a lower adjusted gross income.
Things You Cannot Deduct
Itemized deductions are quite specific. You may notice a line on Form 1040 Schedule A marked "Miscellaneous Deductions," but this space is still reserved for specific expenses such as gambling losses. Always check the instructions corresponding to Form 1040 Schedule A to verify that you are filling it out correctly.
Expenses relating to your personal life do not meet the requirements for itemized deductions. This may include hobbies, home improvement, spas, car repair, licenses, groceries, parking tickets and more.
Although line 21 on Form 1040 Schedule A specifies unreimbursed job-related expenses, note that there are a few exceptions, including professional accreditation fees or expenses, going out to lunch with your coworkers, buying meals when working late, expenses related to commuting to and from work or expenses aimed at improving your personal reputation.
The Formula for Calculating Adjusted Gross Income
If you know that your itemized deductions fall below the standard deduction, calculating your adjusted gross income is straightforward: simply subtract the standard deduction from your gross income. Otherwise, you will need to add up all of your itemized deductions and then subtract that total from your gross income.
- Things That Will Lower Your AGI
- Summary of How to Calculate a Federal Tax Return
- How to Calculate How Much You Get Back from Income Tax
- Where Can I Find My Modified Adjusted Gross Income on My Taxes?
- Earned Income IRA Definition
- Deductions on a Joint Tax Return
- Can I Put My Unreimbursed Partner Business Expenses on Schedule A?
- Are Dividends Included in Adjusted Gross Income?