What is Adjusted Gross Income?

Adjusted Gross Income is simply your total gross income minus specific deductions. Additionally, your Adjusted Gross Income is the starting point for getting to taxable income, calculating your taxes and determining your eligibility for certain tax credits and deductions that you can use to help you lower your overall tax bill.

Read on as we outline more information about Adjusted Gross Income (AGI), how to calculate AGI, and how you, the taxpayer, might be able to reduce your AGI depending on your unique tax situation.

What is AGI?

“What is AGI?” AGI is simply the acronym for Adjusted Gross Income. It’s a common term in the tax and finance world, so it’s important to understand AGI’s meaning and relevance.

To boil it down, it’s simply your total gross income minus specific tax deductions. Some common examples of eligible deductions that reduce adjusted gross income include deductible traditional IRA contributions, health savings account contributions, and educator expenses.

But what does Adjusted Gross Income mean for you in real life? Here are a few places it comes into play!

1.  It’s the starting point for subtracting the standard or itemized deductions to get to your taxable income, then calculating your tax liability and your federal tax rate.

2. It helps you better understand if you qualify for specific tax credits or deductions. (Important tax advice: Some credits and tax deductions have AGI limitations.)

3. It helps determine your eligibility in other financial situations, like applying for a loan to buy property, eligibility to rent an apartment, or even getting a student loan to pay for higher education.

Income definitions, comparisons, and related documents

Let’s face it: tax terminology can get a little confusing. When it comes to talking about federal income tax, several terms sound similar, but they have different definitions and intentions.

To clarify the various ways to talk about income, let’s run through a list of the different types:

• Taxable income –  Taxable income is arrived at by subtracting the standard or itemized deductions—whichever amount is greater—from your AGI. Take note of the nuances between AGI vs. taxable income: These two tax terms are commonly intertwined but represent different things. Long story short, your taxable income is what you’ll use to determine your tax bracket.
• Gross income – Gross income includes all income received from all sources, including monetary gifts, property, and the value of services received. Wages, tips, interest, dividends, rents, and pension income are also examples of sources that contribute to your total gross income (not including tax-exempt income).
• Modified Adjusted Gross Income (MAGI) – This is your AGI plus a few items either added back in or subtracted. Your Modified Adjusted Gross Income determines your eligibility for certain deductions, credits, and retirement plans. Take note: there’s no fixed definition of MAGI, as the modifications vary depending on the specific tax benefit.

What is Adjusted Gross Income on a W-2?

So, where is Adjusted Gross Income on IRS Form W-2? The answer is – it’s not there. AGI is something you calculate from several sources, but it’s not shown on a W-2.  But you will need your W-2 Form to start the calculation. See the “How to calculate AGI section” below.

How to find annual income

Sometimes, when people consider annual income or total annual income, they might be thinking of their salary before or after taxes are taken out from their paychecks. You can find your annual income on your Form W-2 from your employer. (Check out the next section if you’re looking for your AGI from last tax year.)

Finding your prior-year Adjusted Gross Income on 1040 forms

Your prior-year AGI can be used to validate your electronic return with the Internal Revenue Service (IRS). You’ll need a copy of last year’s tax return to locate your Adjusted Gross Income on IRS Form 1040 from the previous tax year. You can find the amount listed on the following lines based on the form you used. If you filed Form 1040, Form 1040-SR, or 1040-NR, your AGI will be listed on Line 11.

How to calculate AGI

If you use software or an online tax preparation service to prepare your tax return, it will calculate your AGI once you input your numbers. But if you want to figure it out by hand, here’s some tax advice on how to calculate AGI by hand:

Add your total income and wages

Begin by tallying your reported income that’s subject to income tax for the year. For most people, it includes job income taken from Form W-2 or 1099s). (Related: What’s the difference between Form W-2 vs 1099?)

You might have other types of income. Here are some examples of other types of income:

• Capital gains
• Dividends
• Interest
• Passthrough income from a partnership or S corporation
• Pensions
• Rental income
• Self-employment income
• Taxable Social Security payments
• Taxable alimony payments
• Unemployment compensation

Subtract “above the line” deductions*

Then, subtract the applicable adjustments to the income listed above from your reported income. Common adjustments, include:

• Educator expenses
• Health Savings Account (HSA) contributions
• Military moving expenses
• Traditional IRA contributions
• One-half of self-employment tax
• Self-employed health insurance deduction
• Self-employed retirement account contributions
• Student loan interest payments

The resulting amount is your AGI. In summary, the calculation is as follows:

Gross Income – Deductions = Adjusted Gross Income

*Note: Itemized deductions and the standard deduction are “below-the-line” deductions.

How to reduce AGI

If you’re wondering how to reduce AGI, we’ll let’s dive deeper so you can take advantage of some of the more common “above the line” deductions.

1. Contribute to a Health Savings Account

If you participate in an eligible Health Savings Account, you may have the option to contribute up to $3,850 (for individuals in 2023) and $7,750 for family coverage in 2023.

Those ages 55 and up can contribute up to an additional $1,000 to their HSA. This contribution can be made until the tax deadline, so you can decide to contribute for the current year up to the tax deadline the following year.

If you haven’t reached the contribution limit for the year, it might be of value to contribute. Contributions are deductible even if you don’t itemize! In addition, HSA funds can remain in the account and don’t expire at the end of the year. Therefore, using tax-free funds, putting money into an eligible HSA could help you cover future out-of-pocket medical expenses.

2. Retirement savings

Contributions to a traditional individual retirement savings account (IRA) can reduce your AGI dollar-for-dollar. If you have a traditional IRA, your income and any workplace retirement plan may limit the amount your AGI can be reduced. The deduction’s upper limit is $6,500 ($7,500 or those over 50 years old). Learn more about tax topics related to retirement income.

3. Student loan interest deduction

Student loan interest is interest paid during the year on a qualified student loan. The student loan interest deduction is another adjustment to your AGI. The maximum deduction you can claim is $2,500 this year – but it’s limited by your income. So, if your filing status is Single, Head of Household, or Qualified Widower, and your modified AGI is more than $90,000 in 2023, you don’t qualify. If you’re Married Filing Jointly and make more than $185,000 in 2023, you also can’t use this deduction to lower your AGI.

4. Educator expenses

Teachers often incur out-of-pocket expenses each school year. Luckily, there’s a tax advantage if you spend your own money on class or classroom costs. In fact, educator expenses can reduce your AGI by offering a tax deduction of up to $300 (for 2023) for qualified K through 12 purchases like books, instructional supplies, classroom technology, and supplementary items used for the classroom. The deduction is up to $600 (for 2023) if an educator is married to another eligible educator and filing under the status married filing jointly (up to $300 per person combined).

Get help with your tax filing and reducing your AGI

By taking advantage of one – or more – of these tax strategies before the end of the year, you could potentially help with reducing your taxable income.

Ready to file your taxes? H&R Block can help. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll help you get your maximum refund.