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Finding Your Adjusted Gross Income in Three Steps
Finding Your Adjusted Gross Income in Three Steps
Finding your Adjusted Gross Income (AGI) is essential for every US taxpayer to know how much they'll owe in federal income tax after the various income adjustments they can take advantage of. It is also essential when making quarterly tax payments, which you can calculate with an 1099 taxes calculator.
AGI is a term that will pop up several times when you're filing your taxes, so it's worth taking the time to understand it. This will better prepare you to file your taxes accurately and save money on your tax bill.
Knowing your AGI helps you file accurate tax returns and pay the correct amount. You can also avoid overpaying for underpaying your taxes if you have the right AGI amount.
Key Takeaways:
- AGI lets you know if you qualify for certain government tax credits and benefits
- An AGI of less than $80,000 increases your chances of qualifying for a tax credit or other benefit
- Medical insurance deductions must be reduced by 7.5% of your total AGI, when factoring them in
Table of contents
What is AGI, and how do you calculate it?
AGI is your gross, or total, income minus certain adjustments, such as contributions to a retirement account or student loan interest. For this reason, your AGI can never be more than your gross income.
To find your AGI, you'll need to start with your gross income for the tax year. This includes income from different sources such as wages, salaries, tips, interest, rental and self-employment income. Then you need to subtract any qualifying adjustments, and you'll arrive at your gross income.
There are many different ways to calculate your AGI, including tax preparation software like FlyFin, which uses A.I. to automatically find adjustments and business deductions by tracking your expenses. You can also consult a tax professional for assistance. Or, you can use a tax tool like small business tax calculator.
Step 1: calculating your gross income
The traditional way to calculate your adjusted gross income is by looking at your bank statements for any payment you received during the tax year, including W-2 wages, salaries,tips, self-employment income, interest and any other income sources. Added together, these are your gross income.
Your gross income calculation can also include investments, interest, dividends and capital gains from real estate or cryptocurrencies. Rent income is also considered part of your gross income, as is any income from a trust or estate.
You now can use income adjustments to lower your gross income and arrive at your adjusted gross income. An adjustment is different from a deduction in that the IRS allows any individual taxpayer to use adjustments to lower their gross income, while business deductions can be taken only by self-employed people to lower their taxable income.
The IRS considers business deductions to be expenses that are ordinary for your line of work and are required to carry out your job. For example, a camera can be a necessary deduction if you are a freelance photographer.
Other business expenses include part of the rent if you work from home, essential supplies necessary for your trade, employee wages and part of the SECA (Self-employment Contributions Act) tax for self-employed individuals. You can also deduct charitable donations and home office expenses.
You can only factor in business deductions after calculating your AGI.
Step 2: factor in adjustments
After you've added all of your income together, you can subtract adjustments including the following to arrive at your AGI.
- Certain education expenses.
- Certain retirement contributions like the IRA may qualify as adjustment, but you can't apply for the IRA adjustment if you are an employee with a 401(k) or 403(b) plan.
- If you travel for work, some of your travel expenses can be deducted.
- Some medical insurance expenses can be deducted.
After subtracting these adjustments, what you have left is your AGI. Once you have your AGI, you can calculate your taxable income and ultimately your tax liability.
Your AGI also determines whether you qualify for government benefits like tax credits. Once you have calculated your taxable amount, you can use any qualifying tax credits to lower further your taxes owed.
It's important to note that tax write-offs and tax credits are two different things. A write-off is a taxable income reduction, and a tax credit is a dollar-for-dollar reduction of taxes owed.
Step 3: calculate medical expense adjustments
The IRS only allows you to deduct medical expenses if they exceed 7.5% of your AGI. Suppose your AGI is $120,000 and your medical expenses amount to $15,000. This amount is more than $9,000, which is 7.5% of your AGI, and you can deduct the exceeding amount. Since you can only deduct the amount over 7.5% of your AGI, you can deduct the amount of expenses over $9,000, which is $6,000.
What’s the use of finding your AGI?
Your AGI is what determines whether you qualify for additional government benefits. This makes calculating AGi very important to ultimately finding your accurate tax amount. It also indicates if you are eligible for several other tax benefits and credits as mentioned in this infographic below.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. technology.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
In addition, you can download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and money.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
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