What is Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is your total gross income for the year minus specific above-the-line deductions — and it's one of the most important numbers on your tax return, as it determines your eligibility for dozens of credits and deductions.
Adjusted Gross Income (AGI) is the amount you get after subtracting certain eligible deductions — called "above-the-line" deductions — from your total gross income. It appears on line 11 of IRS Form 1040 and serves as the baseline used to calculate your taxable income and determine eligibility for a wide range of tax benefits.
AGI Formula: Total Gross Income − Above-the-Line Deductions = AGI
Understanding your AGI is essential because many tax deductions and credits phase out or are limited based on how high your AGI is.
What Counts as Gross Income
Gross income includes virtually all income you receive before any deductions:
- Wages, salaries, and tips (from your W-2 form)
- Freelance and self-employment income (from 1099 forms)
- Business profits
- Investment income: dividends, interest, capital gains
- Rental income
- Retirement distributions
- Unemployment compensation
- Alimony (for agreements finalized before 2019)
Above-the-Line Deductions That Reduce AGI
These deductions reduce your income before the standard or itemized deduction step. Common above-the-line deductions include:
| Deduction | Who Can Use It |
|---|---|
| Traditional IRA contributions | Eligible taxpayers with earned income |
| Student loan interest | Those repaying qualified student loans |
| Self-employment tax (50% deduction) | Freelancers and sole proprietors |
| Self-employed health insurance premiums | Self-employed individuals |
| HSA contributions | Those with a qualifying HDHP |
| Educator expenses | Teachers (up to $300) |
| Alimony paid (pre-2019 agreements) | Payers under pre-2019 divorce decrees |
See above-the-line deductions for a full breakdown.
Why AGI Matters
Your AGI acts as a gatekeeper for a huge portion of the tax code:
Deduction phase-outs: Many itemized deductions are limited by AGI. For example, medical expenses are only deductible to the extent they exceed 7.5% of your AGI.
Credit phase-outs: Tax credits like the earned income tax credit and child tax credit reduce or disappear as AGI rises.
Retirement account eligibility: The ability to deduct traditional IRA contributions and contribute directly to a Roth IRA is limited by AGI.
Student loan deduction: Phases out above certain AGI thresholds.
AGI vs. Modified Adjusted Gross Income (MAGI)
Many tax rules reference Modified AGI (MAGI) rather than plain AGI. MAGI adds back certain deductions to your AGI — the specific addbacks depend on which benefit you're calculating. For example:
- Roth IRA eligibility uses MAGI that adds back student loan interest and certain other items
- Net investment income tax uses MAGI that adds back foreign earned income exclusion
Check the specific rule for whichever benefit you're evaluating — the IRS form instructions will specify whether to use AGI or MAGI.
How to Lower Your AGI
Reducing your AGI is one of the most effective tax strategies because it simultaneously lowers taxable income and increases eligibility for benefits:
- Maximize pre-tax retirement contributions (401(k), traditional IRA)
- Contribute to an HSA if eligible
- Deduct self-employment business expenses
- Take the student loan interest deduction if you qualify
AGI is calculated on Form 1040 — Schedule 1 lists most of the above-the-line deductions that get subtracted from total income to arrive at the AGI figure.