Adjusted Gross Income (AGI) is a crucial figure in your tax return, representing your total income minus certain adjustments or deductions. The IRS uses AGI to determine your eligibility for various credits, deductions, and tax brackets. It is the starting point for calculating your taxable income, which is the amount you will ultimately be taxed on.
AGI is calculated by taking your gross income, which includes wages, dividends, capital gains, business income, and other forms of income, and subtracting allowable deductions. Common deductions that reduce AGI include contributions to traditional IRA accounts, student loan interest, and self-employed health insurance premiums.
Your AGI plays a vital role in determining eligibility for tax credits, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, as well as the amount of itemized deductions you can claim. Higher AGI can reduce the number of tax benefits available to you, making it an essential number to optimize when preparing your return.