How to Calculate Adjusted Gross Income (AGI) for Tax Purposes
Calculating your adjusted gross income (AGI) is one of the first steps in determining your taxable income for the year. Once you’ve determined your adjusted gross income, you can determine your tax liability for the year.
Here are some helpful tips on how to calculate your adjusted gross income (AGI) for tax purposes.
Before calculating AGI, you can determine if you need to file a tax return for the year. The Internal Revenue Service (IRS) provides an interactive tax wizard that can be used to help you determine if you need to file a tax return for the year.
- The first step in calculating your AGI is to determine your total gross income for the year, which includes your salary plus earnings from self-employment and any other income reported on Form 1099, such as investment dividends and pension income.
- To arrive at the final AGI, you are allowed to deduct certain amounts from your total income. For example, teachers can deduct unpaid class expenses, the self-employed can deduct insurance premiums, and everyone can deduct charitable donations.
Even if you are not required to file a tax return, the IRS recommends that you continue to file a tax return. This is because you may be eligible to file a tax return if you paid income taxes or you may be eligible for certain credits.
How to Calculate AGI for Tax Purposes
Gather your income statements
The first step in calculating AGI is to determine your income for the year. Income can be in the form of money, property, or services you receive in the tax year.
Income includes traditional wages and salaries, which are reported on Form W-2, any earnings from self-employment, and any other income reported on Form 1099, such as investment dividends and pension income. Brokerage and barter exchange transaction income reported on Form 1099-B, real estate transaction income reported on Form 1099-S, any taxable interest reported on Form 1099-INT, and any investment dividend reported on Form 1099-S. Form 1099-DIV is considered part of your taxable income.
In addition, you must include the following sources of taxable income:
- business income
- farm income
- The benefits of the union strike
- Taxable refunds, credits, or offsets from state and local income taxes
- Long-term disability benefits received before the minimum retirement age
- jury fees
- Security deposits and rental income
- Prizes, prizes, gambling, lotteries, and contest winnings
- Returned wages from employment discrimination lawsuits
- husband’s support
- unemployment benefits
- capital gains
- severity pay
- Real estate proceeds, royalties, partnerships, S corporations, trusts, and license fees
You can calculate your total income by adding all of these amounts.
Some types of income are not subject to tax. The following sources of income are not considered for AGI:
- workers compensation
- child support benefits
- Life insurance receipts (unless the policy was given to you for a price)
- disability payments
- Capital gains from the sale of your habitual residence
- Money received as a gift or other inherited property
- Canceled debts intended as a gift to you
- scholarships or fellowships
- maternity care payments
- Money transferred from one retirement account to another (as long as it was done through a manager-to-agent transfer)
Decrease in deductions and expenses
To arrive at the final AGI, you are allowed to deduct certain amounts from your total income.
Self-employment tax deduction
As a self-employed person, you pay your full share of Social Security and Medicare taxes. For this reason, you are eligible for a loan from the IRS if you claim a self-employment tax deduction.
Classroom expenses for teachers and educators
If you are a K-12 teacher, instructor, counselor, principal, or counselor for at least 900 hours per school year at an elementary or secondary school, you can deduct up to $250 for unpaid expenses for work you support. during the fiscal year.
Self-employment health insurance deduction
If you are self-employed, you can deduct the full amount you spend on premiums by deducting self-employment health insurance. This also applies if the policy covers the spouse and dependents.
Qualified interpreters and other professions
You can adjust your income if you are a qualifying artist, as well as a reservist and some paid government officials.
In addition to these deductions, there are also deductions for charitable contributions and contributions to Health Savings Accounts (HSAs).
For relocation expenses, as long as you’re in the military, there are various costs related to self-employment, early retirement penalties, and student loan interest.
(In addition to health insurance premiums and half of the self-employment tax, retirement plan contributions are also deductible for the self-employed.)
Be careful when calculating amounts for these categories, as special requirements must be met for each.
Modified AGI vs. AGI
A common mistake inexperienced tax preparers make is to use the AGI in cases where the modified AGI should be used. While your AGI is used to determine the amount of income taxes you owe and certain credits you’re eligible for, your modified AGI is used to determine eligibility for other items, such as a traditional IRA deduction and eligibility to contribute to a Roth IRA.
Work with a professional
Unless you have the time and ability to follow IRS instructions and conduct any necessary investigation, it may be more practical to use the services of an experienced tax professional. While hiring a tax professional may cost you more, it can be worth it given the time saved and the frustration of trying to figure out the rules on your own.
Identifying the AGI may seem like a simple process at first glance. However, even if you use the IRS instructions to complete your tax return, you risk making costly mistakes, especially if you are inexperienced. Even if you complete the process on your own, consider having your results reviewed by a tax specialist to ensure accuracy.