You’ve all probably heard of the term Adjusted Gross Income.
But what does that really mean?
Why do you have to get your AGI from your tax preparer, rather than just adding up your tax forms?
Well, that’s because there are several tax deductions that can be included in your Adjusted Gross Income calculation.
ADJUSTED GROSS INCOME VS. GROSS INCOME
When you think of your income, your gross income automatically pops into your head.
And rightfully so, unless you’re a tax preparer…
Of course, you need your gross income in order to calculate your adjusted gross income.
Your gross income consists of all the money you made throughout the tax year. And this also includes money you earn from other sources, not just your paycheck.
Here’s a list of potential income sources to include in your gross income:
| Income | Tax Form/Other Information |
| Wages, salaries, tips, etc. | W-2 |
| Interest, tax-exempt and taxable | 1099-INT |
| Dividends, qualified and ordinary | 1099-DIV |
| IRA Distributions | 1099-R |
| Pensions and annuities | 1099-R |
| Social Security Benefits | SSA-1099 |
| Capital gain or (loss) | 1099-B |
| Taxable refunds, credits, or offsets | 1099-G |
| Alimony received | *if divorce was finalized by December 31, 2018 |
| Business income or (loss) | Schedule C |
| Other gains or (losses) | Form 4797 |
| Rental real estate, royalties, partnerships, S corporations, trusts, etc. | Schedule E or Schedule K-1 |
| Farm income or (loss) | Schedule F |
| Unemployment Compensation | 1099-G |
| Gambling income | W-2G |
| Cancellation of Debt | 1099-C |
| Foreign earned income exclusion | Form 2555 |
| Taxable Health Savings Account Distribution | 1099-SA |
| Alaska Permanent Fund dividends | 1099-MISC |
| Jury duty pay | 1099-MISC |
| Prizes and awards | 1099-MISC |
| Activity not engaged in for profit income | 1099-MISC |
| Stock options | *if not reported on your Form W-2 |
| Income from rental of personal property | *if you were not in the business of renting such property |
| Olympic and Paralympic medals and USOC prize money | 1099-MISC |
| Taxable distributions from an ABLE account | 1099-QA |
| Other income |
Now that you have your total gross income, we need to make some adjustments to reduce that income.
Hence, Adjusted Gross Income… ?
Check out the list of potential adjustments to reduce your income.
| Adjustments | Tax Form/Other Information |
| Educator Expenses | *up to $250 of qualified expenses paid in the tax year |
| Certain business expenses for reservists, performing artists, and fee-based government officials | Form 2106 |
| Health Savings Account deduction | Form 8889 |
| Moving expenses for members of Armed Forces | Form 3903 |
| Deductible part of self-employment tax | Schedule SE |
| Self-employed SEP, SIMPLE, and qualified plans | |
| Self-employed health insurance deduction | Schedule C or F |
| Penalty of early withdrawal of savings | 1099-INT or 1099-OID |
| Alimony paid | *if divorce was finalized by December 31, 2018 |
| IRA deduction | Form 5498 |
| Student loan interest deduction | 1098-E |
| Archer MSA deduction | Form 8853 |
| Jury duty pay | *if you gave the pay to your employer due to being paid salary while serving on the jury |
| Deductible expenses related to income reported on line 8k | |
| Nontaxable amount of Olympic and Paralympic medals and USOC prize money | |
| Reforestation amortization and expenses | Pub. 535 |
| Repayment of supplemental unemployment benefits un the Trade Act of 1974 | Pub. 525 |
| Contributions to section 501(c)(18)(D) pension plans | Pub. 525 |
| Contributions by certain chaplains to section 403(b) plans | Pub. 517 |
| Attorney fees and court costs for actions involving certain discrimination claims | Pub. 525 |
| Attorney fees and court costs paid in connection with an award from the IRS for information provided to help detect law violations | |
| Housing deduction | Form 2555 |
| Excess deductions of section 67(e) expenses | Schedule K-1 |
| Other adjustments |
These adjustments are typically referred to as “above-the-line” deductions. Since the adjustments are applied before you take your itemized or standard deduction.
To reach your Adjusted Gross Income, you take the total gross income minus your total adjustments.
Let’s look at an example.
| Gross Income | $90,000 | Form W-2 $ 49,720 Form W-2 $40,200 Form 1099-INT $80 |
| Adjustments | $500 | Educator Expenses $250 Student loan interest deduction $250 |
| Adjusted Gross Income | $89,500 |
You’ve reduced your taxable income by $500!
Being aware of these adjustments can save you taxes. Even if you have a tax preparer it is beneficial to be educated on the adjustments that can impact your tax return.
Your tax preparer can only prepare your return with the information that you provide. Therefore, if you do not provide information about adjustments, these adjustments may be missed!
If you’re completing your return yourself, the tax software should automatically calculate your Adjusted Gross Income (AGI) through the tax interview process. Again, that depends on the information you provide, so being knowledgeable on the adjustments you get is beneficial!
Follow along for more tax tips to stay educated this tax season!
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