When it comes to income, there are several important numbers you should know. In addition to your total salary, one of the most-useful income figures is your adjusted gross income, or AGI. This basically refers to your total earned income, with a few specific adjustments subtracted out. Here's what adjusted gross income is, how you can determine yours, and what it's used for.
Salary and gross income
Your salary includes the total amount of money you get paid from your job before any taxes or other payroll deductions are taken out. If you don't know your salary, it should be fairly easy to calculate. Simply look at one of your recent pay stubs, locate the pre-tax pay (excluding overtime or bonuses), and multiply by the number of pay periods in a year.
For example, if you get paid bi-weekly (26 times per year), and your pre-tax income on one of your paychecks is $2,000, your salary is $52,000.
Going further, gross income is a much-more useful number to know. It includes your salary, as well as any other forms of income you may have. This can include, but is not necessarily limited to:
- Interest income
- Rental income
- Capital gains
- Self-employment income
Adjustments to income
When determining your taxable income, the first thing the IRS does is subtract certain items, known as adjustments to income. These can change over time, but currently include:
- Qualified retirement contributions, such as to a 401(k) or traditional IRA
- Teacher classroom expenses
- Moving expenses, if related to starting a new job
- Alimony paid
- Tuition and fees
- Bad (uncollectible) debts owed to you
- Student loan interest
Once these items are subtracted from your gross income, the result is your adjusted gross income, or AGI.
Don't confuse adjustments to income with tax deductions. Tax deductions, also called "below the line" deductions, can only be taken if the taxpayer chooses to itemize; otherwise, he or she takes the standard deduction. Adjustments to income can be taken whether or not the taxpayer itemizes.
Adjusted gross income -- why it's important
Your adjusted gross income is important for a few reasons. First, it's the number that determines whether you qualify for certain tax breaks. For example, the American Opportunity Credit, the mortgage insurance deduction, and the ability to directly contribute to a Roth IRA, all depend on your AGI.
AGI is also used by many lenders when you apply for a loan in order to determine your ability to repay. Some government assistance programs also use AGI to determine whether or not you qualify.
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