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.