Adjusted gross income (AGI) is your total annual income minus certain adjustments. 

Your AGI includes all sources of gross income, including wages, self-employment income, dividends, capital gains, and retirement distributions. It’s adjusted by certain adjustments such as retirement contributions, student loan interest, educator expenses, and certain self-employment expenses to name a few. 

Your AGI can be one of the most important figures related to your taxes. In addition to contributing to determining your tax liability for the year, it’s also used to determine eligibility for certain income-based tax deductions and credits, as well as your monthly payments for income-driven student loan repayment plans. When you’re filing your tax return, it’s important to calculate this number accurately (if you’re using tax software, it will calculate it for you). 

What Constitutes Adjusted Gross Income (AGI) 

As we mentioned, your AGI is the difference between your total gross income and certain income adjustments. Forms of taxable income that are included in your AGI may include: 

• Wages and employee benefits 

• Self-employment income 

• Income from side jobs 

• Business income 

• Investment income, including capital gains, interest, and dividends 

• Benefits, including retirement, unemployment, and Social Security 

• Canceled debts 

• Alimony payments received 

• Court awards and damages 

• Gambling winnings 

• Prizes and awards 

Read more: Is Social Security income taxable? 

The sum of all of your gross income for the year is reduced by certain adjustments. Some of the most common income adjustments used to calculate AGI include (but aren’t limited to): 

• Educator expenses 

• HSA contributions 

• Moving expenses for military members 

• Deductible portion of the self-employment tax 

• Self-employed retirement plan contributions 

• Self-employed health insurance premiums 

• Alimony payments paid 

• IRA contributions 

• Student loan interest 

How is adjusted gross income (AGI) calculated? 

If you use tax software to file your annual tax return, then it will calculate your AGI for you based on the information you provide as it is a number calculated and found on page 1 of your tax return. Adjusted gross income is generally found on line 11, page 1 (2023) of the Individual Tax Return 1040. Below is generally how AGI is calculated. 

As we mentioned, your AGI is the difference between your total gross income and certain adjustments. Here’s how you’ll calculate it: 

1. Add up all of your income from the sources listed above. If you aren’t sure if something is considered income, the IRS provides a comprehensive list on its website. Enter this number on line 9 of your Form 1040, the individual federal tax return form. 

2. Add up all of your adjustments to income. To do this, you’ll use Schedule 1 of Form 1040. You’ll find a list of adjustments on that form. Enter this number on line 26 of Schedule 1 and on line 10 of Form 1040. 

3. Subtract your adjustments from your total income. As directed on Form 1040, you’ll take line 9 (your total income) minus line 10 (your total adjustments from Schedule 1). The result is your AGI, which you’ll enter on line 11 of Form 1040. 

Your AGI helps determine your eligibility for certain tax credits and deductions. If you incorrectly calculate your AGI, you could fail to claim a deduction or credit you’re eligible for or erroneously claim one you aren’t eligible for and have to pay it back to the IRS. 

Importance of previous year's AGI 

There may be situations where you need to know your previous year’s AGI. For that reason (and others), it’s important to maintain copies of your previous tax returns and know where to access this information. 

Your previous year’s AGI is often used as a verification tool for the IRS, such as when you’re filing your taxes electronically. It allows them to confirm your identity by asking you for the number on line 11 of your last Form 1040. 

If you aren’t able to provide your previous year’s AGI when asked for it, you may run into obstacles when electronically filing your taxes and may find there’s a delay in processing. 

If you didn’t maintain a copy of your previous year’s tax return but used tax software or an accountant to file your taxes, those sources should be able to provide you with a copy. 

Significance of adjusted gross income (AGI) in state taxes 

Your AGI isn’t just an important factor for your federal income taxes it can be an important figure in determining your state taxable income as well. 31 states and the District of Columbia have you use your Federal AGI as a starting point when you’re completing your state income tax return.¹  

And though some other states use their own calculations, many of them rely on state calculated adjustments similar to those used by the federal government but modified for the state’s specific tax rules. Like the federal tax code, your AGI may also be the factor that determines your eligibility for certain state deductions and credits. 

When you’re completing your state tax return, it’s important not just to assume everything is the same as on your federal return. You must thoroughly read your tax forms and the information that’s needed. Each state has its own unique tax code and laws, so it’s important to ensure you’re completing your state returns accurately. 

Understanding Modified Adjusted Gross Income (MAGI) 

Your modified adjusted gross income (MAGI) is your AGI with certain adjustments added back in or removed. MAGI is used to determine your eligibility for several different things, including: 

• Eligibility to contribute to a Roth IRA 

• Eligibility to deduct your traditional IRA contributions 

• Eligibility for health insurance premium tax credits 

• Eligibility for certain education credits 

• Eligibility for the Child Tax Credit 

• Eligibility to deduct your student loan interest 

Read more: Tax credits: Everything you need to know 

MAGI can be a confusing concept because it has several different uses, and it’s calculated in a different way for its different uses. Additionally, it’s not a number that appears on your tax return, making it difficult to find on your own. If you’re confused about what your MAGI is or whether you’re eligible for certain deductions or credits, you should consult a tax professional. 

Understanding adjusted gross income (AGI), gross income, and taxable income 

Your AGI, gross income, and taxable income are three of the most important figures you’ll need when filing your tax return. And while they all sound similar, they’re actually very different. 

First, your gross income is your total amount of income that may be subject to taxation. It includes your wages, interest, dividends, capital gains, self-employment income, and more. It’s calculated before any deductions or adjustments to income and, therefore, doesn’t necessarily control your final tax liability. This number is generally higher than your AGI. 

Next, your taxable income refers to the portion of your income that is ultimately taxed. While your gross income is generally higher than your AGI, your taxable income is generally lower. You calculate your taxable income by finding your AGI and then subtracting any deductions you’re eligible for which can be either the standard deduction or your itemized deductions, along with the qualified business income (QBI) deduction (if you’re eligible).  

Once you calculate your taxable income, you’ll be able to calculate your actual tax liability using the tax brackets provided by the IRS. Remember, the marginal tax brackets are progressive, which means all of your income isn’t taxed at your highest marginal tax rate. Instead, each dollar of income is taxed starting at the lower rate brackets that corresponds to the amount of income needed to fill that bracket and then moving up. As your taxable income increases so do the potential tax rates that apply to the higher dollars of your taxable income that fall into that respective bracket. For example, you may find that some of your income is taxed at 10%, some at 12%, and so on up the bracket. There are also preferential tax brackets that apply to items like Long-term Capital Gain income and Qualified Dividend income as well. 

When you’re filing your taxes — and even throughout the year — it’s worth looking for ways to reduce your taxable income. Not only will this reduce the portion of income that you pay taxes on, but it could also help push you into a lower maximum tax bracket. 

Conclusion 

Your AGI can be one of the most important figures on your federal tax return. It’s a starting point to help calculate your taxable income and determine whether you’re eligible for certain tax credits, deductions and other benefits. Because of the importance of your AGI, you must ensure you’re calculating it accurately when filing your tax return. If you’re unsure whether you’ve calculated your AGI correctly or you want someone else to do it on your behalf, consider hiring a tax professional or using tax filing software to complete your tax return. 

1 Tax Policy Center, “State and Local Tax Policies,” May 2024. 

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