How to calculate adjusted gross income (AGI)
The short answer is that you can calculate your adjusted gross income by starting with your gross income, including income from a job, self-employment or freelance income, retirement income such as Social Security payments and 401(k) withdrawals, unemployment compensation, investment income (such as from stock sales or dividends) and any other sources. Then you subtract all of the adjustments for which you qualify.
As an example, let's say that your gross income is $100,000. You have the following adjustments:
- $5,000 in qualified retirement plan contributions
- $1,000 in student loan interest
- $2,000 in contributions to an HSA
By taking your $100,000 gross income and subtracting the $8,000 in adjustments you qualify for, you have an AGI of $92,000.
Note that this is different from taxable income. Before the tax brackets are applied to your income, you'll subtract your other deductions, such as the standard deduction.
Finally, it's also worth mentioning that if you use tax software, such as TurboTax or TaxAct, these calculations will all be done for you. But it's still important to understand which deductions can reduce your AGI each year since these can be extremely valuable when qualifying you for other tax advantages.
Adjusted gross income vs. modified adjusted gross income
There's a slightly different version of adjusted gross income known as modified adjusted gross income, or MAGI, which is technically the income number used for certain tax benefits. In a nutshell, MAGI calculations start with your AGI and add back certain deductions, such as student loan interest.
As if this wasn't complex enough already, there is not a single calculation formula for MAGI. The exact calculation procedure depends on which tax benefit it is being calculated for. As an example, if you're trying to determine eligibility for Roth IRA contributions, you'd add back student loan interest, foreign earned income, foreign housing deductions, excluded savings bond interest, and excluded employer adoption benefits (obviously, many of these don't apply to the majority of taxpayers). On the other hand, to determine liability for the net investment income tax, you would only add in the foreign adjustments.
As with AGI, if you use tax software, your MAGI for each tax subject will be calculated for you, so there's no need to know the individual requirements. The key takeaway is simply that certain tax benefits and qualifications use a slightly different version of AGI.
