Adjusted Gross Income (AGI)

Adjusted Gross Income can impact the credits and deductions you are able to claim, this can lead to a reduction in the amount of taxable income reported on your tax return.

You are probably paying more attention to your taxable income then your adjusted gross income when you are preparing your tax return. You should also be paying attention to your adjusted gross income as it will directly impact the credits and deductions you are eligible for, this can reduce the amount of taxable income you report on your return.

Calculating AGI

There are certain deductions that will reduce your total income and help you figure out your adjusted gross income. Adjustments may change each year when you file your taxes, but several these deductions will show up on your taxes year after year. Some of the adjustments include, alimony payments to a former partner, contributions to certain retirement accounts such as traditional IRA’s, half of self-employment taxes that you are required to pay and deductions for tuition and school fees.

You will have to use Form 1040 to claim every possible adjustment, if you use Form 1040A it will reduce the number of available adjustments you can take. If you are filing a 1040EZ your AGI is the same as your totally income as the form does not allow you to take any adjustments to income.

How it affects deductions

Most common deductions taken every year by tax payers are subject to limitations by AGI. If you itemize for example you should reduce your medical and dental expenses by 10% of your Adjusted Gross Income. This means that you are only allowed to deduct the amount that exceeds 10% of your AGI. If you have a lower AGI you would be able to deduct more medical and dental expenses.

All adjustments to income are subject to an AGI limitation, even if those deductions are used to calculate AGI. If you are eligible to deduct education expenses your Modified Adjusted Gross Income will determine if you qualify.

AGI Implications

If your state requires that you file an annual tax return your AGI may also impact your taxable state income. Many states use your Federal Adjusted Gross Income as the starting point to calculate your taxable state income. If you claim tax credits, like the lifetime learning credit for school expenses, the IRS requires that your Modified Adjusted Gross income is below a certain amount to take the credit.