When you file your taxes, you are going to notice that there is a figure known as you adjusted gross income or AGI. Knowing what the adjusted gross income definition is, and how it impacts your taxes, is important toward filing an accurate return and getting all the money back that you are potentially entitled to.
What is Adjusted Gross Income?
Your adjusted gross income is your gross income minus any applicable adjustments. Not very helpful, huh? For example, if you run a business or own a rental, you can take business expenses off of your gross income. This will lower your gross income and lower your adjusted gross income. Keep in mind that your adjusted gross income will further be reduced by your standard deduction (or itemized deductions) and personal exemptions to arrive at your taxable income.
Adjustments to Arrive at Adjusted Gross Income
To calculate your adjusted gross income, start with your gross income and subtract the adjustments. Some examples of adjustments that you will subtract include:
To help you calculate your adjusted gross income, you can use the tax calculator.
How Does Adjusted Gross Income Help You?
Adjusted gross income lowers your taxable income right off the bat. For example, if you made $30,000 last year, but you have $1,000 in student loan interest, you will have an adjusted gross income of only $29,000. If you had business expenses of an additional $15,000, your adjusted gross income goes down even further. Lowering your AGI will then lower your taxable income and put you in a lower tax bracket.
Adjusted Gross Income vs Gross Income vs Taxable Income
Your gross income is all the money that you made in the past year. Your adjusted gross income is what the IRS is going to start with when it comes to what you may owe as tax. Your taxable income is the income that you are going to be taxed on. You adjust your gross income with the qualified adjustments to get your AGI, then you take the standard deduction and personal exemptions afterward to get your taxable income.
An example of this would be:
You make $30,000 this year (gross income) and you have $10,000 worth of adjustments, so your AGI is $20,000. After deducting $5800 for the standard deduction, and then taking $3700 as your personal exemption, assuming you are filing status is single, you would have a taxable income of just over $10,000.
To sum it up, your AGI will lessen the amount of your income that taxed.
Now that you understand adjusted gross income, of course, we have to mention that is different than your modified adjusted gross income.
