How To Calculate Adjusted Gross Income (AGI) for Tax Purposes

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How To Calculate Adjusted Gross Income (AGI) for Tax Purposes

One of the first stages in estimating your taxable income for the year is calculating your adjusted gross income (AGI). You can calculate your tax due for the year after you’ve estimated your adjusted gross income.

Here are some pointers on calculating your adjusted gross income (AGI) for tax reasons.

You can assess if you need to submit a tax return for the year before calculating your AGI. The Internal Revenue Service (IRS) offers an interactive tax helper to assist you in determining if you need to submit a tax return for the year.

Key Takeaways

  • The first stage in calculating your AGI is to calculate your total gross income for the year, which includes your salary as well as any profits from self-employment endeavors and other income reported on 1099 forms, such as investment dividends and retirement income.
  • You may deduct various sums from your overall income to arrive at your final AGI. For example, teachers can deduct unreimbursed classroom expenses, self-employed people can deduct insurance premiums, and everyone can deduct charitable donations.

Even if you are not obligated to submit a tax return, the IRS encourages that you do so. This is because if you paid income tax, you may be eligible for a tax return, or you may be eligible for certain credits.

To calculate your AGI:

  1. Calculate your total taxable income.
  2. Sum totals of taxable income from all sources.
  3. Subtract from the total any permitted deductions and expenditures.

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Gather Your Income Statements

The first step in calculating your AGI is to establish your annual income. Income may be money, property, or services received throughout the tax year.

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Income comprises standard salary and wages reported on Form W-2, self-employment earnings, and any additional income reported on 1099 forms, such as investment dividends and retirement income. Proceeds from broker and barter exchange transactions reported on Form 1099-B, proceeds from real estate transactions reported on Form 1099-S, any taxable interest reported on Form 1099-INT, and investment dividends reported on Form 1099-DIV are all taxable income.

You must additionally list the following sources of taxable income:

  • Business income
  • Farm income
  • Union strike benefits
  • Refunds, credits, or offsets of state and local income taxes that are taxable
  • Long-term disability benefits obtained prior to reaching the mandatory retirement age
  • Jury duty fees
  • Rental property income and security deposits
  • Gambling, lottery, and contest wins are all examples of awards and rewards.
  • Compensation for back wages from labor discrimination litigation
  • Spousal support
  • Unemployment benefits
  • Capital gains
  • Severance pay
  • Rental real estate earnings, royalties, partnerships, S companies, trusts, and licensing payments

By combining all of these figures together, you may compute your overall income.

Income That Is Not Taxed

Certain forms of income are exempt from taxation. Your AGI is not affected by the following sources of income:

  • Workers’ compensation benefits
  • Child support benefits
  • Proceeds from life insurance (unless the policy was turned over to you for a price)
  • Disability payments
  • Gains on the sale of your principal residence
  • Money acquired as a gift or other assets inherited
  • Debts that were cancelled as a gift to you
  • Grants for scholarships or fellowships
  • Foster care payments
  • Transferring funds from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)
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Subtract Deductions and Expenses

You may deduct various sums from your overall income to arrive at your final AGI.

Deduction for Self-Employment Tax

You pay the full portion of your Social Security and Medicare taxes as a self-employed individual. As a result, if you claim the self-employment tax deduction, you are entitled for an IRS credit.

Classroom Expenses for Teachers and Educators

If you work at least 900 hours each school year as a kindergarten through grade 12 teacher, instructor, counselor, administrator, or assistant in a school that offers elementary or secondary education, you may deduct up to $250 in unreimbursed work-related costs throughout the tax year.

Self-Employment Health Insurance Deduction

The self-employment health insurance deduction allows you to deduct the whole amount you spend on premiums if you are self-employed. This is also true if your coverage includes your spouse and dependents.

Qualified Performing Artists and Other Professions

If you are a qualified artist, a reservist, or a fee-based government officer, you may change your income.

In addition to these deductions, charity donations and contributions to Health Savings Accounts are also allowed (HSA).

There are numerous charges associated with self-employment, early withdrawal penalty amounts, and student loan interest for relocating expenditures if you are in the military services.

(In addition to health insurance payments and half of the self-employment tax, self-employed individuals may deduct retirement plan contributions.)

Be cautious while calculating the numbers for these categories, since each has unique criteria.

Modified AGI vs. AGI

Inexperienced tax preparers often make the error of using AGI when the adjusted AGI should be utilized. While your AGI is used to calculate how much income tax you owe and which credits you are qualified for, your modified AGI is used to assess eligibility for other things such as deducting conventional IRA contributions and ability to contribute to a Roth IRA.

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Work With a Professional

Unless you have the time and talent to follow the IRS guidelines and undertake the required research, hiring the services of an experienced tax expert may be more feasible. While hiring a tax expert may be more expensive, the time saved and stress avoided from attempting to work out the laws on your own may be well worth it.

The Bottom Line

At first look, calculating your AGI may seem to be an easy task. Even if you follow the IRS rules to the letter, you face the danger of making expensive errors, particularly if you are inexperienced. Even if you finish the procedure on your own, consider having your findings reviewed by a tax specialist to confirm their correctness.

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