All You Need to Know About AGI

There are a lot of terms and abbreviations that come up when you’re filing your taxes. Honestly, sometimes it feels like a foreign language. We don’t have to search your Google history to know you’re looking up every one of them. Sorry to call you out like that! But it’s ok…we want to teach you all about the words that affect YOU and your business. You might have heard your accountant or tax preparer use the term “AGI.” Do you know what they mean by that? Wait! Don’t Google it just yet, keep reading…

What is AGI?

AGI, or Adjusted Gross Income, is what it sounds like: your gross (total) income, minus some adjustments. Gross income includes wages, business income, dividends, retirement account distributions, and other income.

Ok, are you still with us?

Adjustments are credits and deductions that help lower your income, which lowers the amount of tax that you owe on that income. Student loan interest payments, educator expenses, and retirement plan contributions are all examples of possible adjustments to your gross income. 

How do I figure out my AGI?

First, you need to add up all of your sources of income. This is the fun part! You get to see exactly how much money you’re earning! That includes income from jobs, business, retirement distributions, and investments, as well as other sources of income, like rental income, social security, farm income, and unemployment income. Then, you subtract adjustments to income. In addition to the adjustments mentioned above, HSA contributions, alimony payments, certain business expenses, and moving expenses (for active duty military) can also be subtracted as adjustments to income. Your tax preparer will calculate your AGI using a tax preparation software. If you’re curious, you can find your AGI on the first page of your 1040 tax return, on line 11.

Why do I need to know my AGI?

If we’re doing all the number work, you might wonder why your AGI matters? Well, there’s actually a few reasons why your AGI is important to us AND you.

AGI is the starting point for figuring out the amount of tax you’ll owe on your tax return. After your AGI is calculated, a few more deductions can be subtracted to get to your taxable income. From there, credits and any tax withheld or estimated tax payments are subtracted to figure out the actual amount of tax you owe.

Your AGI can also determine what credits and deductions you’re eligible for. For example, The Earned Income Credit (which could save you between $560 and $6935 in taxes for the 2022 tax year) is only available to people with an AGI less than $59,000. Another example is medical expenses can be deducted on your tax return as an itemized deduction, but only if they’re over 7.5% of your AGI for the year.

If you have student loans, AGI is an important number to be aware of. If you’re on an income based loan repayment plan, your AGI helps to determine the amount of your monthly payments. AGI can also help to determine if you qualify for student loan forgiveness. This is one reason that married couples may choose to file separately if one spouse has student loans to repay. Filing separately means they would be reporting a lower AGI than if they filed jointly. That means they would be eligible for lower payments, and more likely to be eligible for loan forgiveness.  

We know, we just threw a lot of numbers and tax lingo your way but the point is, the more accurate your AGI (based on what you report) the more accurate your taxes will be.

If we’re filing your return for you, we’ve got you covered when it comes to AGI and all of the credits and deductions it may affect. We know the right questions to ask. But if you have any questions about your AGI or any possible adjustments to it, book a consultation call with our Tax Manager, Charrise. She knows it all and loves to help!