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You want to see if you can deduct a retirement contribution or submit your income on a mortgage application, and the term adjusted gross income (AGI) pops up. What is it? Although you may know your annual salary or weekly unemployment benefit amount offhand, AGI is another thing altogether.
AGI is common shorthand for your overall income. It's calculated as part of your tax return and often used on loan, credit or government benefit applications. What's AGI and where do you find it? Read on.
What Is Adjusted Gross Income?
AGI is your gross—or total—income minus a few "adjustments." Gross income includes wages, dividends, capital gains, business income, retirement distributions and additional items like tips, rental property income and unemployment benefits. Adjustments include educator expenses, student loan interest, alimony you've paid or contributions you've made to a retirement account.
To distinguish between three types of income you may be asked about:
- Gross income is all income that is not specifically tax-exempt.
- Adjusted gross income subtracts "above the line" adjustments like student loan interest and retirement contributions.
- Taxable income is AGI minus standard or additional itemized deductions.
What Is AGI Used for?
AGI is one of the key metrics that determine how much income tax you owe, both at the state and federal levels. Once you calculate your AGI, you're ready to take your allowable deductions and exemptions and figure out how much tax you owe.
The IRS also requires you to enter your prior year's AGI when you e-file if you've prepared your own taxes. You'll find your AGI on last year's IRS Form 1040, line 8B.
AGI is the figure lenders are looking for when they ask for your income on a mortgage application. Your AGI provides insight into multiple sources of income, not just your wages. This helps your lender get a clearer picture of how large a loan payment you can afford each month, based on all of your monthly income. Your AGI is also relatively easy for a lender to verify by reviewing your past tax returns.
Applying for financial aid? AGI is the income used for the Free Application for Federal Student Aid (FAFSA). Overall, it's never a bad idea to clarify what a credit card company, lender or even the IRS means when they ask you for income information. But, more often than not, your AGI is the number they're looking for.
How to Calculate Your Adjusted Gross Income
Your most recent tax return can be a great help in calculating your AGI. In fact, if you're looking for your most recent AGI, it's listed on your last tax return (as mentioned, on line 8B on Form 1040). If you need a more current number or your tax return isn't handy, here's a quick guide to calculating your adjusted gross income:
Add up your income. Total up all sources of taxable income. These include wages, self-employment income, unemployment benefits, tips, investment dividends, taxable interest, taxable alimony, royalties, capital gains, income from real estate investments and any other income that is not tax-exempt. What doesn't qualify as gross income? The list of exceptions is relatively long. It includes life insurance benefits, some Social Security benefits, scholarships and some employee benefits.
Gather up your adjustments. Check out all the options for above-the-line deductions, which include student loan interest, tuition, retirement account contributions and educator expenses. Add up all the adjustments that apply.
Subtract your adjustments from your gross income to get your AGI.
Here's an example of how this math works:
Wages (from your W-2): $72,000
Dividend income: $3,100
IRA contribution: $2,500
Student loan interest: $635
Adjusted Gross Income (Gross income minus adjustments):
$75,100 - $3,135 = $71,965
If your finances are simple and accuracy isn't mission-critical, doing these back-of-the-envelope estimates is fine. However, if you need more detail, visit the IRS website for current information on gross income, exceptions, adjustments and more. And if you're submitting your AGI as part of a mortgage application, FAFSA or your tax return, consider working with a tax professional who can help you make sure your calculations are comprehensive and accurate. To find a trusted tax professional, you can use this IRS resource.
How Adjusted Gross Income (AGI) Compares to Modified Adjusted Gross Income (MAGI)
In a few cases—for example, if you want to contribute to a traditional or Roth IRA or apply for certain federal tax benefits such as adoption tax credits—you may need to provide a modified adjusted gross income (MAGI) instead of an AGI. What's the difference? Typically, MAGI is AGI with certain deductions added back. These deductions may include:
- Student loan interest
- Tuition and fees
- Foreign earned income exclusion
- Foreign housing exclusion or deduction
- Excludable savings bond interest
- Excluded employer-provided adoption benefits
MAGI may be calculated differently for different applications. For example, IRS publication 590-A, Contributions to Individual Retirement Arrangements, has worksheets to compute MAGI for traditional IRA eligibility and for Roth IRA eligibility, with a slight difference between the two. If you're being asked to provide MAGI, look for specifics on how it should be calculated. In many cases, there is no difference—or very little—between AGI and MAGI; the deductions involved are relatively rare.
Calculating and Using Your AGI
Although AGI is a graspable concept—and a real number you can calculate yourself—it does require a bit of math and technical knowledge to get it right. Enlisting the help of a tax professional, tax preparation software or even your past tax returns can make that math a little easier.
If you're planning to use your AGI on a mortgage, loan or credit card application, don't overlook the value of preparing your credit as well. Checking your Experian FICO® Score☉ and credit report, and taking the time to improve your credit if that's warranted, can work hand in hand with your qualifying income to land you the credit or loan you want.