What Is AGI (Adjusted Gross Income): Short Guide for Taxpayers

AGI stands for adjusted gross income, and is a figure the IRS often uses to determine your tax liability. While most taxpayers are familiar with the term, they often don’t realize its significance. You need to understand what AGI is to better manage your finances and fulfill your obligations during the tax season.

In this article, we’ll learn all you need to know about AGI and its importance. We’ll show you where to find it on your tax return and how to calculate it yourself. We’ll also examine MAGI, which is Modified Adjusted Gross Income.

Key Takeaways

• AGI is short for adjusted gross income, and it’s your total taxable income minus certain deductions.
• Common deductions used for AGI calculations include alimony payments, deductible HSA and IRA contributions, interest on student loans, etc.
• AGI influences your tax bracket, and it’s used to determine eligibility for various government programs, financial aid, and loans.
• MAGI is short for modified adjusted gross income, and it’s calculated by taking AGI and adding back some of the deductions.

What Is AGI?

Adjusted gross income (AGI) represents gross income once certain deductions (adjustments to income) have been made.

First, gross income represents total earnings that you’ve made. This includes money from various sources, ranging from wages and dividends to capital gains and retirement income. It encompasses tips, interest, stock dividends, and so on.

Deductions subtracted from gross income for the purpose of calculating AGI are referred to as “above-the-line” deductions. They are not to be confused with itemized and standard deductions, which you will further deduct from your AGI.

There are different types of deductions used to calculate AGI, including:

• Alimony payments
• Some business expenses
• Deductible IRA and HSA contributions
• Retirement contributions
• Deductible self-employment taxes
• Moving expenses for military personnel
• Interest on student loans

In essence, AGI represents a more refined figure than gross income, so the IRS uses it to determine your tax liability.

Here is a brief comparison between gross income and adjusted gross income:

If a person’s gross income was $80,000, with $3,000 in deductible student loan interest and $2,000 in IRA contributions, a quick example of AGI calculation would be:

• $80,000 - ($3,000 + $2,000) = $75,000

Why Is AGI Important?

AGI is important as it has many use cases that extend beyond tax filing. Let’s see what they are:

Impact on Tax Brackets, Deductions, and Credits

Your AGI dictates your tax bracket, while many credits and deductions also depend on it. For example, a lower AGI can place you in a lower tax bracket, directly impacting your overall tax liability. Moreover, how much of your medical expenses you can deduct also depends on your AGI and typically can’t exceed 7.5% of it.

Apart from increasing the amount of deductible medical expenses, AGI also influences your eligibility for tax credits. Child Tax Credit, Earned Income Tax Credit, and various education credits can all become unavailable at higher AGI figures.

It’s also important to be aware of the specific limits. For example, an AGI income limit in 2025, for the purpose of the Child and Dependent Care Tax Credit (CDCT), is $15,000. For each $2,000 beyond that, the credit will be reduced by 1% (but not below 35%).

Role in Government Programs

Your AGI is typically one of the main aspects used to determine eligibility for various government assistance programs. For instance, it is used when applying for federal student aid. When you’re filling out your Free Application for Federal Student Aid (FAFSA), you’ll use AGI to calculate your Expected Family Contribution.

It’s also common to use AGI for healthcare subsidies. The Affordable Care Act (ACA) may use AGI or MAGI to determine how much of a premium tax credit you may receive. This credit is used to help with your health insurance coverage, and you’ll typically get a better deal the lower your AGI is.

Use for Loans and Financial Aid

Many lenders look at your AGI when you’re applying for a loan (e.g., a mortgage or a personal loan). They do this since this number represents a clear picture of your financial conditions and the amount of disposable income that you have.

In this case, a lower AGI is generally not advantageous, as lenders are looking for individuals with a greater capacity to repay their debt. Since different lenders may look at different aspects, it can be beneficial to research them and understand how they view your financial information when you’re applying for a loan.

How to Calculate Adjusted Gross Income (AGI)?

Here is a three-step process used to calculate adjusted gross income:

1. Determine your gross income. The first step in the process involves calculating your total taxable income from all sources, before any taxes or deductions are taken out. Some of the most common sources include wages and salaries, as well as tips, bonuses, freelance income, interest, dividends, and more.

2. Subtract the adjustments to income. Once you have your gross income, you need to adjust it by subtracting “above-the-line” deductions, such as:

• Educator expenses
• Some business expenses
• Deductible self-employment taxes
• Deductible HRA contributions
• Deductible IRA contributions
• Retirement contributions
• Alimony payments
• Student loan interest

3. Reach your AGI. Once you’ve subtracted all applicable adjustments, the final figure that you get to will be your adjusted gross income, or AGI.

To put this into practice, here is an example of an AGI calculation:

• Gross Income: $120,000
  • Wages: $85,000
  • Bonuses: $10,000
  • Interest: $5,000
  • Dividends: $5,000
  • Rental Income: $15,000

• Adjustments to Income: $10,500
  • Traditional IRA Contribution: $7,000
  • HSA Contribution: $1,500
  • Student Loan Interest: $2,000

• AGI Calculation: $120,000 (Gross Income) - $10,500 (Total Adjustment) = $109,500 (Adjusted Gross Income)

Where to Find AGI on Your Tax Return?

You can find your AGI on the Form 1040. It’s on line 11, under the Income section. The form will guide you through the calculation by instructing you to subtract line 10 (adjustments to income from Schedule 1, line 26) from line 9 (sum of lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 9, which is your total income).

You can’t find your AGI on a W-2 form, so if you need this figure from a previous year, you can find it on your prior year’s tax return, or you can request a transcript from the IRS. This can also be important when using tax preparation software. Many of these programs may ask for your AGI from a prior year to verify your identity with the IRS.

What Is Modified Adjusted Gross Income (MAGI)?

Modified adjusted gross income (MAGI) is an altered version of AGI. It’s calculated by taking the adjusted gross income and adding some of the deductions back to it. The deductions that you need to add to AGI when calculating MAGI depend on the reason for which you’re doing the calculation.

For instance, if you want to apply for the Child Tax Credit, you’ll add a foreign housing deduction, as well as foreign earned income and income from Puerto Rico and American Samoa residents that has been excluded.

On the other hand, when calculating MAGI for the Premium Tax Credit, you’ll add foreign earned income, tax-exempt interest, and nontaxable Social Security benefits.

As a result, MAGI is a flexible figure that requires a different calculation for specific circumstances.

AGI vs. MAGI vs. Taxable Income

Let’s compare AGI vs. MAGI vs. taxable income to understand them all and recognize the main differences:

• AGI (Adjusted Gross Income). Total taxable income minus certain deductions. This is the main figure often used to determine a person’s tax obligations, as well as eligibility for various deductions and credits.

• MAGI (Modified Adjusted Gross Income). A modified version of AGI, with some of the deductions added back into the calculation. It’s used for specific purposes (e.g., when applying for the Child Tax Credit or determining whether you owe net investment income tax). The calculations for MAGI vary depending on the purpose of the figure.

• Taxable Income. Any type of money, property, goods, or services that you receive, and on which you have to pay taxes. It includes everything from wages and employee benefits to interest, dividends, royalties, and alimony payments. Most income is taxable. A sum of all types of taxable income gives you a starting point in AGI calculation.

Track Your Income to Calculate AGI With Paystub.org

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Final Thoughts

Your AGI is an essential financial figure used in everything from calculating your tax liability to determining your eligibility for various credits and benefit programs. Understanding what counts as AGI, where to find AGI on your tax return, and what the legal strategies are for lowering it can help you reduce overall tax liability and improve your financial well-being.

By being proactive in managing your AGI (and MAGI), you can achieve significant savings and unlock additional perks (e.g., easier student loan payments). Don’t forget to check out Paystub.org if you need to generate tax and financial documentation to improve your record-keeping and make AGI calculations easier.

What Is AGI FAQ

#1. What is included in adjusted gross income?

Adjusted gross income includes earnings from all taxable sources (such as wages, dividends, capital gains, self-employment income, etc.) minus “above-the-line” deductions (such as deductible HSA and IRA contributions, alimony payments, interest on student loans, etc.).

#2. What is the difference between AGI and MAGI?

The difference between AGI and MAGI is that MAGI adds some deductions back to AGI. MAGI stands for modified adjusted gross income and is typically used to determine your eligibility for some credits, deductions, and taxes.

#3. Does AGI affect my tax refund?

AGI can affect your tax refund. A lower AGI may qualify you for various tax deductions and credits, which can lower the amount you owe, enable a refund, or increase it if you’re already eligible for it.

#4. How can I reduce my AGI legally?

To legally lower your AGI, you can increase your “above-the-line” deductions. For example, by maximizing your HSA and IRA contributions, you’ll further reduce your gross income and get a lower AGI.

#5. Do student loans affect AGI?

Yes, student loans affect AGI as the interest you pay on them can be deducted from your gross income. In this case, lowering your AGI by maximizing relevant deductions can help with student loan payments that are income-based, like Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).