Adjusted Gross Income (AGI)
Think of your Adjusted Gross Income (AGI) as your total income after subtracting a few common deductions like student loan interest or retirement contributions that help lower the amount you’re taxed on.
What is Adjusted Gross Income (AGI)?
Ever looked at your tax return and thought, “What does any of this even mean?” You’re not alone; nearly half of adults say tax forms are confusing. Among the maze of numbers and unfamiliar terms, one line stands out: your Adjusted Gross Income (AGI). This is your total income for the year minus certain deductions allowed by the IRS.
How to Calculate AGI
Calculating your adjusted gross income is pretty simple! Just follow these steps, the IRS recommends:
- Start with Your Total Income: This includes all income from various sources such as wages, dividends, capital gains, business income, retirement income, and other forms of taxable income.
- Subtract Allowable Adjustments: From your total income, deduct specific expenses permitted by the IRS. These adjustments can include:
- Alimony payments
- Educator expenses
- Certain business expenses – reservists, performing artists, fee-based government officials
- Deductible HSA contributions
- Deductible IRA contributions
- Moving expenses – military only
- Deductible self-employment taxes
- Penalties on early savings withdrawal
- Retirement contributions
- Student loan interest
The resulting number after these subtractions is your Adjusted Gross Income (AGI).
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Get startedWho Needs To Know About AGI?
In short, everyone who files taxes, but some individuals should pay special attention:
Even if someone else handles your taxes, understanding AGI gives you a better understanding of your money.
How AGI Impacts Your Retirement
Your AGI doesn’t just influence your tax return, it can shape your long-term financial plans. Here’s how:
- Tax Credits and Deductions: Your AGI could help determine which ones you qualify for.
- Roth IRA Contributions: Your ability to contribute directly to a Roth IRA depends on your income. Too high, and you’ll be ineligible.
- IRA Deductibility: If you or your spouse are covered by a workplace retirement plan, your ability to deduct Traditional IRA contributions may phase out depending on your AGI.
- Healthcare Subsidies: If you purchase health insurance through the marketplace, your AGI affects your subsidy eligibility.
- Social Security Taxation: A higher AGI in retirement may mean a larger portion of your Social Security benefits is taxed.
- Medicare Premiums: Your AGI can impact how much you pay for medical insurance and prescription drug coverage.
- Saver’s Credit: This credit rewards lower-income individuals who contribute to retirement accounts but it phases out if your AGI is too high.
How to Reduce Adjusted Gross Income
Reducing your AGI can potentially result in a lower tax bill and could help you qualify for more tax breaks. Here are a few common ways to reduce it:
By managing your AGI, you can maintain eligibility for valuable retirement benefits and keep more of your income.
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Understanding how your Adjusted Gross Income (AGI) works can help you make more informed decisions when it comes to taxes and retirement. At the same time, PensionBee makes it easy to manage your retirement savings by helping you combine your old 401(k)s and IRAs into one account.
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Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
