Adjusted Gross Income (AGI) can directly affect the deductions and credits you’re eligible for, which may end up reducing the amount of taxable income you report on your tax return.
A brief description of the AGI
When preparing your tax return, you probably pay more attention to your taxable income than your Adjusted Gross Income (AGI). However, your Adjusted Gross Income is also noteworthy, as it can directly affect the deductions and credits you’re eligible for, which may end up reducing the amount of taxable income you report on your return.
Calculating adjusted gross income is relatively straightforward.
- It is equal to the total income you report and is subject to income tax, such as income from work, self-employment income, and interest from a bank account, minus any specific deductions, or “adjustments,” that you are eligible for. to drink.
- Your Adjusted Gross Income is calculated before taking the standard or itemized deduction, which you report in later sections of the return.
Adjustments to income are specific deductions that directly reduce your total income to arrive at your Adjusted Gross Income. The types of adjustments that can be deducted are subject to change each year, but some of them consistently appear on tax returns from year to year. Some of these settings include:
- half of the taxes you pay for self-employment
- the payment of alimony made to a former spouse (for agreements before 2019)
- contributions to certain retirement accounts (for example, a traditional IRA )
Impact of deductions
Many of the deductions that taxpayers commonly take each year are subject to AGI limitations. If you itemize deductions, for example, you must reduce your medical and dental expenses by 7.5% of your Adjusted Gross Income. This means that you can only deduct the amount that exceeds 7.5% of your Adjusted Gross Income. Therefore, the lower your Adjusted Gross Income, the more medical and dental expenses you can deduct.
Even some of your adjustments to income are subject to AGI limitations even though those deductions are necessary to calculate your own Adjusted Gross Income. If you are eligible to deduct some of your tuition payments, your Modified Adjusted Gross Income (MAGI) determines if you qualify.
Other implications of the AGI
If you live in a state that requires you to file annual income tax returns, your Adjusted Gross Income may also affect your state’s taxable income. This is because many states use your federal AGI as the starting point for calculating state taxable income. And if you claim a tax credit, like the Lifetime Learning Credit, for your school expenses, the IRS requires that your MAGI be below a certain amount to claim the credit.
When you use TurboTax to prepare your taxes, we’ll ask you simple questions about your income and guide you step-by-step through adjustments to disposable income and other deductions. We handle all of the AGI and MAGI calculations and determine exactly how this affects your other deductions.
Do your taxes your way with TurboTax. Do them yourself, with the help of an expert, or have an expert do them for you from start to finish. Your taxes will be well done.