What is adjusted gross income?

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If you’re a taxpaying American, chances are you’ve come across the term “adjusted gross income.”

Your adjusted gross income, or AGI, is how the IRS determines whether you qualify for certain tax deductions and credits. It’s also the income cutoff that the United States government will use to send stimulus checks to Americans as part of its massive coronavirus relief package, should it become law. 

The stimulus checks are one-time direct payments being sent to low and middle-income Americans. The exact amount each person will receive is based on the AGI reported on their latest tax return; the maximum payment is $1,200 for individuals, plus an additional $500 per child for parents. For most people, the relevant AGI can be found on either this year’s tax return or their 2018 return.

It’s important to understand that AGI is different than gross income. Gross income is the amount of money you receive in any given year, including wages, tips, capital gains, business income, and retirement distributions. 

Once you know your gross income, you can find your AGI by subtracting above-the-line deductions, otherwise known as “adjustments to income.” These deductions include the following: 

  • Student-loan interest
  • Contributions to a qualified retirement plan or traditional IRA
  • Health-savings account contributions
  • The employer portion of self-employment taxes
  • Health insurance premiums for self-employed people
  • The penalty on early savings withdrawals
  • Alimony paid on a divorce settled prior to 2019
  • Moving expenses for active military members

If the current coronavirus relief bill is signed into law, up to $300 of cash donations to a nonprofit charity will also count as an above-the-line deduction beginning with tax year 2020.

Each year when you complete your tax return, you’ll calculate your AGI. Then you will either claim the greater of the standard deduction or your total itemized deductions, such as charitable donations and property taxes. The resulting amount is your taxable income.

You may also see the term “modified adjusted gross income,” or MAGI. This is your AGI with certain deductions added back in and is used for determining eligibility for additional tax breaks, like the tuition and fees deduction.

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