AGI stands for “adjusted gross income.” AGI is the bottom-line number on the front side of the federal Form 1040. It’s a key number as a taxpayer’s AGI determines eligibility for credits and various deductions elsewhere on the tax return.
AGI calculations can be complicated, but the basic formula is: items of income (wages, net income from sole proprietorships, capital gains, etc.) minus certain deductions that are taken on the front side of the 1040.
Those “certain deductions” are currently:
- The “educator expenses” deduction, which allows a teacher in K-12 schools to take a deduction for up to $250 of classroom supplies.
- Certain expenses from people in the military reserves, certain performing artists, and fee-basis government officials.
- A deduction for money put into a health savings account during the year.
- Moving expenses.
- A deduction for 1/2 of the self-employment tax imposed on a self-employed taxpayer.
- A deduction for amounts put into a SEP, SIMPLE or 401(k) plan by a self-employed taxpayer.
- A deduction for penalties on early withdrawals of savings. (NOTE: this refers to penalties paid to banks for withdrawing money from accounts such as CDs. It DOES NOT refer to the 10% early withdrawal penalty on IRA and 401(k) distributions.)
- A deduction for alimony paid.
- A deduction for money put into an IRA during the year.
- A deduction (up to $2,500) for student loan interest paid.
- The “tuition and fees” deduction for college expenses.
- The “domestic production activities deduction.”
Each of these items is worthy of its own blog post, so I won’t go into further detail here. And for more tax terms put in simplified language, visit the Glossary page on this website.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”