Definition of adjusted gross income
Adjusted gross income (AGI) is a calculation taken from your gross income to determine the taxable amount. Your AGI is your gross income minus any adjustments the IRS tracks. If you’ve ever heard of “tax deductions”, it’s in reference to your AGI.
Here are some common inferences:
- Moving expenses due to a professional, commercial or military move
- Interest on student loans or tuition fees
- Alimony
- Freelance expenses
- Charitable donations
Itemizing your deductions will lower your AGI, which lowers your taxable income. Accurate reporting of your AGI on IRS Form 1040 determines your eligibility for claims on your tax return. The more claims you are entitled to, the more money you will receive on your return.
Figuring out what deductions you qualify for can be tricky, so it’s best to consult with a local tax expert or CPA.
Modified Adjusted Gross Income
Another important part of your finances to know is modified adjusted gross income (MAGI). Your MAGI determines the following:
- If you can contribute to a Roth IRA
- Whether you can deduct your regular IRA contributions from your taxes
- Your eligibility for the premium tax credit
To calculate your MAGI, take your AGI and add the following deductions:
- Specific tax exemptions (homestead, handicap, senior or veteran)
- Pension fund and social security contributions
- Interest on student loans or tuition fees
- Excluded foreign income
- Rental and other passive income or losses
It is normal for your AGI and MAGI to be close on the way up. While you can still contribute to a traditional IRA, if your MAGI exceeds IRS limits, you won’t be able to deduct those contributions from your taxes.
To qualify for the premium tax credit, your MAGI must be between 100% and 400% of the federal poverty level. Just like with your adjusted gross income, determining your MAGI could mean more money on your tax return.
