Adjusted gross income

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Question: What is adjusted gross income?

Answer: Your adjusted gross income (AGI) is your gross income reduced by deductions other than itemized deductions, the standard deduction, and personal exemptions. Examples of deductions used to arrive at your AGI include business expenses, IRA contributions, student loan interest expense, alimony paid, and job-related moving expenses.

Your AGI determines whether you are eligible for more than two dozen tax benefits, such as tax credits and certain deductions. As your AGI increases, the maximum amount you can claim for certain deductions and credits decreases. For example, your IRA contribution will not be deductible if you are covered under your employer’s pension plan and your adjusted gross income exceeds certain limits.

Question: How does “adjusted gross income” differ from “gross income”?

Answer: For income tax purposes, there are three levels of income: gross income, adjusted gross income, and taxable income.

Gross income includes income from all sources whatsoever unless specifically excluded by tax law. Gifts and inheritances, for example, are specifically excluded from income.

To arrive at adjusted gross income (AGI), you are allowed a long list of deductions from gross income including such things as business expenses, certain losses, and retirement account contributions. These deductions, also called above-the-line deductions, are allowed even if you don’t itemize your personal deductions (if you choose instead to use the standard deduction). AGI is an important number because it is used to determine certain other tax benefits.

Taxable income is AGI minus your itemized deductions (or standard deduction) and your personal and dependency exemptions. Taxable Income is used to determine your tax bracket, your tax rate, and your ultimate tax liability.



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