What Is Adjusted Gross Income (AGI) And How Does It Affect My Tax Return?
UPDATED: Aug 3, 2023
The IRS uses adjusted gross income (AGI) to determine your income tax liability for the year. We’ll discuss how to calculate it and how its results can affect you and your finances.
What Is Adjusted Gross Income (AGI)?
AGI is your total income minus IRS-recognized reductions, also known as adjustments to income. Your total income (or gross income) can include your salary, self-employment income, capital gains, dividends or bank account interest. And contributions to a retirement or health savings account and student loan interest are common adjustments.
How To Calculate AGI
You can calculate your adjusted gross income yourself or use an online tax service to calculate your AGI and get a jump-start on filling out your tax return. Taxpayers can use Form 1040 ES to calculate their gross income on page one and their adjustments on page two.
1. Calculate Your Gross Income
To calculate your AGI, you must first calculate your total income by adding up all your sources of income for the year. Your sources of income can include wages, unemployment benefits, royalties, commission, property sale revenue and any other sources of taxable income.
2. Subtract Adjustments To Your Income
Adjustments to your income are all made “above the line,” meaning that the adjustments are taken off the top of your gross income. Adjustments to your gross income can vary depending on your situation and can be influenced by unexpected life events like jury duty, a new job or a pandemic.
The amount you have left after subtracting your deductions from your gross income is your AGI.
Discuss your situation with a tax professional to make sure you can take full advantage of these adjustments.
What Do I Use My AGI For?
For most taxpayers, the next decision they’ll need to make is whether to take the standard deduction or itemize their deductions. Once you figure out which deduction is greater than the other, subtract it from your adjusted gross income to find your taxable income.
Standard Deduction
If your itemized deductions are less than the standard deduction, take the standard deduction. The standard deduction is a no-questions-asked deduction that covers the basic cost of living.
For the tax year ending in 2023, the standard deduction has been adjusted for inflation. Many taxpayers choose the standard deduction and use tax rates to calculate the amount of tax they owe.
| Filing Status | Standard Deduction for 2023 | Increase For Inflation |
|---|---|---|
| Married couples filing jointly | $27,700 | up $1,800 |
| Single taxpayers and married individuals filing separately | $13,850 | up $800 |
| Heads of households | $20,800 | up $1,400 |
The Bottom Line: Understand The Significance Of Your Adjusted Gross Income To Your Taxes
Anything you can take off the top of your gross income translates into tax savings. Familiarizing yourself with IRS rules on adjusting your gross income is always a good idea. Remember, the more you can put away for the future, the less you’ll pay in taxes today.
Are you interested in learning more about managing your money ahead of tax season? Sign up for the Rocket Money℠ app, and we’ll help you find ways to save money each month.
Victoria Araj
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