What is adjusted gross income (AGI)?

AGI defined

AGI is gross income minus certain adjustments to that income, according to the IRS. Gross income refers to the total income earned by someone on a paycheck before taxes and other deductions.

Your AGI is extremely important because it’s the basis for figuring out your taxable income. The lower your AGI, the lower your taxes. A Jackson Hewitt Tax Professional can help you with this process to ensure that you’re capturing all possible deductions, but we’ll go through more below.

How to calculate AGI

To calculate AGI, you would include your various streams of income, as reported to the IRS by your employer on Form W-2 or self-employment income less deductions, plus other income, such as investment dividends and miscellaneous income, normally reported on Form 1099.

Next, you add any taxable income from other sources, such as unemployment compensation, pensions, Social Security payments, or anything else that hasn’t already been reported to the IRS. You’d then subtract certain deductions, or “adjustments” that you’re eligible to take. You then have your AGI.

The formula for finding your AGI includes income from:

• Various jobs
• Investments
• Real estate
• Social Security
• Unemployment
• Pensions
• Businesses
• Farms

And then subtract:

• Educator expenses
• Certain business expenses
• Deductible health savings account (HSA) contributions
• Moving expenses for military
• Deductible self-employment (SE) taxes
• Contributions to retirement plans or health insurance for self-employed people
• Penalties on early withdrawals of savings
• Deductible IRA contributions
• Student loan interest
• Deductible tuition and fees

From there, you can either take the standard or itemized deductions to help reduce the tax you pay, depending on your specific situation. These are examples of some of the factors going into figuring out your AGI, and there may be more options available to you. A Tax Pro can always help you with these calculations and which forms you may need.

Standard versus itemized deductions and AGI

Tax deductions, often called tax write-offs, can help deduct a certain amount of your taxable income. As part of the Inflation Reduction Act, the standard deduction for married couples filing jointly for tax year 2023 rises to $27,700, up $1,800 from the prior year.

For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900. And for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

Standard deduction amounts for 2023 taxes (Returns due April 2024)

If your total itemized deductions exceed the amounts above, you may consider itemizing. If you have less than the standard deduction to write off, stick with that. A Jackson Hewitt Tax Pro can help decide what is best for your specific situation.

The IRS also provides a list of itemized deductions and the requirements for claiming various deductions on Form 1040, Schedule 1.

Some of these include:

• Educator expenses
• HSAs
• Several self-employment costs, such as retirement plan contributions, health insurance premiums, and half the self-employment tax as reported on Schedule SE
• Savings withdrawal penalty amounts
• Student loan interest
• Tuition and other education expenses
• The traditional IRA deduction
• Alimony paid in 2018 or earlier
• Moving expenses for certain members of the military
• Costs incurred by military reservists, performing artists, and fee-based government officials.

You can work with your Tax Pro to see what other deductions may apply to you and your family.

The impact of AGI on tax returns

AGI is critical in figuring out many credits and some of your allowed standard deduction amounts, even what your eventual tax bill—or refund—may be.

For tax year 2023, the top tax rate remains 37% for individual single taxpayers with taxable incomes greater than $578,125 ($693,750 for married couples filing jointly). The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

Here’s a complete list of the rates:

• 37% for incomes greater than $578,125 ($693,750 for married couples filing jointly)
• 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
• 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
• 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
• 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
• 12% for incomes over $11,000 ($22,000 for married couples filing jointly); and
• 0% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

How to find AGI on tax forms

Your AGI for the previous tax year may be used to confirm your electronic return with the IRS. It’s important to keep those documents when filing. To find your AGI, you’d look at your previous year’s tax return.

If you filed IRS Form 1040, your AGI will be listed on Line 8b.

What is Modified Adjusted Gross Income (MAGI)?

While AGI is crucial, Modified Adjusted Gross Income (MAGI) may be necessary to figure out if you’re eligible for certain deductions and credits, such as the Child Tax Credit, Lifetime Learning Credit, government health care plans, and certain retirement plans.

To get your MAGI, you start with your AGI and depending on your return, you may have to modify it by adding or subtracting certain elements. MAGI is your AGI plus these, if any: untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest. Your Tax Pro is always there to work with you to see whether you will need to calculate your MAGI.

It’s important to note that:

• For many people, MAGI is identical or very close to AGI.
• MAGI doesn’t include Supplemental Security Income (SSI).
• MAGI doesn’t appear as a line on your tax returns.

AGI, MAGI, and program eligibility thresholds

We’ll go a little more in depth about how your AGI and MAGI thresholds will dictate your eligibility for certain tax deductions and credits.

Child Tax Credit and MAGI

You’d also use MAGI to claim tax credits, such as the Child Tax Credit. You can claim the full Child Tax Credit if your MAGI is under $200,000—or under $400,000 if you and your spouse file a joint return. If your MAGI is greater than $200,000 ($400,000) the credit is reduced by $50 for each $1,000 over the threshold amount.

MAGI and the Lifetime Learning Credit

If you paid expenses related to college, graduate, or vocational school, you may claim the Lifetime Learning Credit. This is a non-refundable credit of up to $2,000 (per return) of qualified tuition, fees, and expenses you paid for yourself, spouse, or a dependent. You do not have to be in a degree program, a full-time student, or in the first four years of post-secondary education. In addition, your MAGI cannot be more than $90,000 if single, or $180,000 for married couples filing a joint return.

MAGI and government health care plans

MAGI is also used to determine eligibility for healthcare waivers and incentives under the Affordable Care Act (ACA) for states' health insurance marketplaces. It is also used as a threshold for qualifying state Medicaid programs. It’s also used to figure out eligibility for the Children's Health Insurance Program (CHIP), among other initiatives.

Roth IRA and MAGI

MAGI is also used to decide your eligibility to contribute to a Roth IRA. Roth accounts use after-tax dollars and grow tax-exempt (unlike traditional retirement accounts that are instead tax-deferred).

To contribute to a Roth IRA, your MAGI must be below the limits specified by the IRS. If you’re within the income threshold, your contribution amount is also decided by your MAGI. Your contributions are phased out if your MAGI is more than the allowed limits.

These are just some examples, but there are many others that a Jackson Hewitt Tax Pro can help you with.

Self-employed workers and AGI

There have been some changes in the past few years that affect self-employed workers. The Tax Cuts and Jobs Act of 2017 (TCJA) ended the ability for workers to deduct unreimbursed job-related expenses from your AGI, but there are also some important additions. 

Qualified Business Income deduction

In good news, the TCJA added a new Qualified Business Income (QBI) deduction. If you’re self-employed or a small-business owner, you may be eligible for a deduction of 20% of eligible income before taxes. The deduction is available to taxpayers whose AGI is below $182,100, or whose joint taxable income is less than $364,200, in 2023.

QBI includes income from a trade or business, like rideshare driving, e-commerce or online retail, consulting, or reselling income. It does not include wages earned as an employee or business-generated capital gains, interest, and dividend income.

This is just one piece of the tax puzzle for those with self-employment income. A Tax Pro can help you with your specific situation if you’re self-employed or have side gig income.

What’s the difference between Adjusted Gross Income and Net Income?

Net income is the amount an individual or business makes after deducting costs, allowances and taxes. For businesses or companies, it is the total sales of a business or company minus expenses such as cost of goods sold, general and administrative expenses, operating expenses, depreciation, interest, and taxes. It’s sometimes called net profit or after-tax income.

One key difference is that net income is used for both businesses and individuals, while AGI is only applicable to individuals.

As mentioned above, gross income is the entire amount of money an individual makes, including wages, salaries, bonuses, and capital gains from your investments. While AGI, and MAGI, is an individual's gross income after accounting for deductions and adjustments.

Your AGI is crucial in figuring out how much you may pay or receive when tax time comes around. Question? We are here for you. Find one of our Jackson Hewitt Tax Professionals near you who can help with all your questions year-round.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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