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Adjusted Gross Income Definition

Adjusted gross income is simply your total gross income, including salary, business income, and other income sources, minus any income adjustments like retirement contributions or student loan interest. The formula looks like this:

Total Income – Adjustments = Adjusted Gross Income (AGI)

What is the Difference Between Gross Income and Adjusted Gross Income?

Your gross income is the total of all your sources of income before any adjustments are made to it. But your adjusted gross income (AGI) first takes your gross income and then subtracts adjustments from it.

That means that your AGI is often going to be a lower amount than your total gross income. It could be the same if you don’t have any adjustments, but it can’t ever be higher. Why is this important? Because you are taxed on your AGI, meaning you’ll pay less tax as your AGI gets lower.

How Do I Calculate Adjusted Gross Income from My W-2?

Although your adjusted gross income is not on your W-2, you can use it to calculate your AGI.  Start by finding your total wages on your W-2 from the previous year. Then, you’ll need to add other forms of income that are taxable, such as rental income, taxable gains, interest, and self-employment. (This is a partial list.) Finally, you’ll subtract any income adjustments (such as educator expenses) to find your AGI.

What Reduces Your Adjusted Gross Income?

In the US, the tax code lets you reduce your adjusted gross income on your tax return when you:

  • Contribute some of your wages into a health saving account (HSA)
  • Give money to charity
  • Sell an asset to balance capital gains
  • Contribute to an education savings plan (to adjust your state adjusted gross income)
  • Pay for your property taxes and/or mortgage interest before the end of the year

The ways that you can lower your adjusted gross income change from time to time on both a state and federal level, so it can be helpful to use professional tax services. If you need to learn more about taxes, contact ATM Tax Pro now for help with your tax problems.