How To Calculate AGI (Adjusted Gross Income)

Understanding adjusted gross income (AGI) is crucial for professionals in all industries as we move into 2026. Mastering this calculation not only alleviates stress during tax season but can also lead to significant savings. As tax laws evolve, having a clear grasp of AGI becomes even more vital.

Consult any accountant or tax prep expert, and they will emphasize the importance of accurately calculating your AGI when filing taxes and reporting income to the IRS. This calculation often serves as the first step in determining your annual taxable earnings and the applicable tax bracket.

Correctly calculating AGI on your tax form and including all eligible tax deductions can substantially lower your federal, state, or local tax obligations. Your AGI is a cornerstone figure on your tax return that influences your overall tax liability.

What Is Adjusted Gross Income?

Adjusted gross income is defined as your total annual income minus any deductible expenses that can be claimed based on your filing status and other allowable criteria.

To calculate your AGI, you start with your total earnings for the year, which includes salary, bonuses, self-employment profits, and investment income, then subtract allowable amounts such as unreimbursed classroom expenses for educators and qualified tuition payments.

Other deductible expenses may include student loan interest, health savings account contributions, self-employed health insurance premiums, and certain moving expenses for military personnel.

Your AGI is reported on your federal tax return, typically on line 8b of IRS Form 1040, and is essential for determining the total taxes owed and any available tax credits or breaks for individuals, couples, or families. By following the tips in this article, you’ll be equipped to accurately estimate and calculate your AGI, take into account standard deductions for U.S. taxpayers, and successfully file your taxes while maximizing tax benefits.

Adjusted Gross Income vs. Modified Adjusted Gross Income

Adjusted gross income is frequently mistaken for modified adjusted gross income (MAGI), which can create confusion during tax filing.

AGI represents an individual’s total annual income minus qualifying deductions, while MAGI includes AGI plus specific deductions that were subtracted from total taxable income.

Common “add-backs” in MAGI that are not included in AGI consist of student loan interest, portions of self-employment tax, tuition expenses, passive income or losses, IRA contributions, non-taxable social security benefits, foreign earned income, and rental losses.

Although AGI and MAGI may be similar, both figures impact eligibility for various tax benefits, making accurate reporting essential. AGI typically determines your income tax liability and eligibility for credits such as the child tax credit, earned income tax credit, and American opportunity tax credit.

In contrast, MAGI is crucial for determining eligibility for certain tax deductions and contributions to a Roth IRA.

How To Calculate Adjusted Gross Income For Tax Purposes

Calculating your AGI may initially seem daunting, but the process is straightforward, akin to calculating the inflation rate.

The first step is determining your total earnings for the year as reflected in your income statements. For tax purposes, income can consist of money, property, or services.

Your taxable income includes the salary reported on your W-2 form, any income from 1099 forms, and profits from self-employment, all of which must be factored into your AGI calculation.

The IRS specifies that the following items should be included when determining gross income:

• Earnings from rental real estate, royalties, partnerships, S corporations, trusts, and license payments
• Severance pay
• Capital gains
• Unemployment benefits
• Spousal support
• Back pay from labor discrimination lawsuits
• Awards, prizes, gambling, lottery, and contest winnings
• Security deposits and rental property income
• Jury duty fees
• Long-term disability benefits received before minimum retirement age
• Taxable refunds, credits, or offsets of state and local income taxes
• Union strike benefits
• Farm income
• Business income

While most earnings must be included, some income types are exempt from taxation and should not be counted in your AGI:

• Money rolled over from one retirement account to another via a trustee-to-trustee transfer
• Foster care payments
• Scholarships or fellowship grants
• Canceled debts intended as a gift
• Certain inherited assets or money received as a gift
• Capital gains on the sale of your primary residence
• Disability payments
• Life insurance proceeds
• Child support benefits
• Workers’ compensation benefits

After accounting for all qualified earnings, the next step is to determine your eligible tax deductions and subtract them from your total income to arrive at your AGI.

Depending on your salary, job, tax filing status, and other life circumstances, various adjustments may apply, allowing you to deduct specific expenses, thereby reducing your AGI and tax burden.

Generally, individuals with lower AGIs qualify for more deductions and tax credits.

By itemizing deductions or utilizing the IRS standard deduction, you can compute your final AGI for the tax year. Common adjustments to consider include:

• Medical and dental expenses
• Deductible taxes
• Home mortgage points
• Interest expenses
• Charitable contributions
• Tuition and fees
• Business use of home
• Business use of car
• Business travel expenses
• Work-related education expenses
• Casualty, disaster, and theft losses

It’s wise to consult with a tax professional, as tax laws can change frequently.

After adjusting and subtracting any applicable deductions from your gross income, the resulting figure is your AGI for the tax year.

Understanding Adjusted Gross Income Deductions

Grasping which deductions you qualify for can be complex, as circumstances vary greatly among taxpayers. Each individual is subject to different tax brackets, which can influence eligibility for refunds, breaks, and credits.

Deciding between a standard deduction or itemized deductions is crucial based on your personal and professional situation. Both methods allow taxpayers to lower their taxable income and are widely utilized across various industries and age groups.

A standard deduction is a predetermined figure set by the IRS based on filing status, age, and disability status. If your deductible expenses exceed this amount, itemizing may be more beneficial.

Itemized deductions allow you to specifically list all eligible tax adjustments, such as mortgage interest, charitable gifts, and unreimbursed medical costs, on Schedule A of Form 1040. Often, itemizing leads to lower tax liabilities than the standard deduction.

For itemized deductions, it’s vital to keep all receipts and proof of expenses, such as bank statements, insurance bills, and receipts from qualified charitable organizations, in case of an audit.

Both deduction methods can significantly lower your taxable income and provide substantial savings depending on your tax bracket. Taxpayers typically choose the option that maximizes their savings. Consulting with an accountant or tax professional can clarify which deduction is most advantageous for your unique financial situation.

Final Thoughts

Accurately calculating your adjusted gross income is the first step to effectively completing your tax returns and ensuring you only pay the taxes due based on your annual earned income. By understanding and calculating your AGI properly, you can save significant amounts on your tax bill, depending on your total taxable income and the tax bracket you fall into. This knowledge will help you avoid discrepancies when filing your state, federal, and local taxes.

Author

Elsie Boskamp

Elsie is an experienced writer, reporter, and content creator. As a leader in her field, Elsie is best known for her work as a Reporter for The Southampton Press, but she can also be credited with contributions to Long Island Pulse Magazine and Hamptons Online. She holds a Bachelor of Arts degree in journalism from Stony Brook University and currently resides in Franklin, Tennessee.