Taxes What Is Adjusted Gross Income? AGI Explained in Less Than 5 Minutes By Shelley Elmblad Shelley Elmblad Shelley Elmblad is an expert in financial planning, personal finance software, and taxes, with experience researching and teaching savings strategies for over 20 years. She earned her bachelor's in business administration from the University of Wisconsin and has successfully completed additional coursework and certificates in public administration, computer networking, small business accounting, and small business management. learn about our editorial policies Updated on January 26, 2022 Reviewed by Eric Estevez Reviewed by Eric Estevez Eric is a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Example of AGI How Adjusted Gross Income Works Adjusted Gross Income vs. Gross Income Frequently Asked Questions (FAQs) Definition Adjusted gross income (AGI) is a tax term for your gross income minus tax deductions that are allowable whether or not you itemize deductions when you file your tax return. Photo: Andersen Ross Photography / Getty Images Definition and Example of Adjusted Gross Income When filing your taxes, your adjusted gross income is simply your gross income minus any adjustments. AGI is the figure that will be used to guide many other calculations and thresholds, such as for credits and deductions, which is important because the lower it is, the less tax liability you'll have. To find AGI, after you have added up your full taxable income (gross income), you can take several "above-the-line" deductions to lower that taxable amount. These are called "above the line" because they apply whether you itemize your deductions or take the standard deduction. They're also called "adjustments to income," and they're calculated on IRS Schedule 1. For example, if you are a school teacher who purchases necessary classroom supplies, these can be deducted as an expense. Using these deductions will allow you to lower your adjusted gross income, potentially resulting in a tax refund. Acronym: AGI Note Adjustments to income are deducted from your gross income. Itemized or standard deductions are then deducted from your AGI to arrive at your final taxable income. How Adjusted Gross Income Works Your AGI is calculated on the first page of your U.S. federal tax return (Form 1040), using information from Schedule 1. Calculating AGI is an important first step because it serves as the foundation for determining the deduction and credits for which you may qualify and the income tax you owe. To determine your AGI, start with your gross income and subtract qualifying items to reduce the amount. Common items can include: Educator expenses, such as supplies paid for by teachersMoving expenses for members of the armed forcesHealth care savings account deductionCollege tuition and fees or student loan interestContributions to certain retirement accountsSEP-IRA, SIMPLE IRA, and 401(k) deductions for the self-employedPenalties from financial institutions for early withdrawal of savingsAlimony payments If you're doing your own taxes, tax software can automatically calculate your AGI. The use of software can help you avoid any mathematical errors. The software will accurately do all the tax calculations as it walks you through the tax interview. Otherwise, if you don't understand the difference between AGI and gross income or how to calculate it, you may pay more than you need to in income taxes. Adjusted Gross Income vs. Gross Income Before you calculate your adjusted gross income, you must determine your gross income—the total income on Form 1040—that you earned for the tax year in which you're filing. Gross income includes all money you have made on your paychecks before payroll taxes. However, it isn't limited to your paycheck—it includes money you earn from other sources, too. Gross income can include other employment earnings in addition to salaries (bonuses, for example), as well as interest and dividends, long- and short-term capital gains and losses, interest, dividends, alimony, pensions and annuities, rental property income, royalties, and any revenue derived from operating a business. Also, if you sold any items on eBay, Craigslist, or another online store, you have gained income from profits by selling goods. Gross income also includes net gains on disposal of assets, such as selling a home or car, or any money obtained through self-employment, consulting, side jobs, and other sources of income. All of these income sources are accounted for on the first few lines of Form 1040 and Part I of Schedule 1. Note It's important not to confuse gross income with net income. Net income refers to take-home pay or the amount of money earned after payroll withholding, such as state and federal income taxes, Social Security taxes, and pretax benefits like health insurance premiums. The list of items that contribute to your total gross income is extensive, and you may need help determining what's considered income for this purpose. Tax software will help you identify all earnings that need to be reported to the government by asking questions in the tax interview, or you can ask an accountant for advice. Key Takeaways Your adjusted gross income (AGI) is your taxable income after removing any adjustments to your gross income.It is used to determine any deductions and credits you will receive. It also determines the taxes you will have to pay.Your AGI is calculated before you take itemized or standard deductions. Frequently Asked Questions (FAQs) What is included in adjusted gross income? Your AGI is an adjustment of your gross income, so it includes all sources of income (wages, dividends, capital gains, business income, retirement distributions, etc.) but it then reduces the full amount with any above-the-line adjustments you are eligible for. These will depend on your situation but may include educator expenses, student loan interest, alimony payments, or contributions to a retirement account. Are AGI and taxable income the same thing? No, but your AGI is a step on the way to reaching your taxable income. Once you have taken adjustments from your gross income to reach your AGI, you can then apply credits and deductions to reach your taxable income. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Definition of Adjusted Gross Income." Accessed Dec. 17, 2021. Internal Revenue Service. "IRS Schedule 1—Additional Income and Adjustments to Income." Accessed Dec. 17, 2021. Internal Revenue Service. "Form 1040." Accessed Dec. 17, 2021.