Quick overview

Adjusted Gross Income (AGI) is the subtotal on your federal tax return that starts many tax calculations. It isn’t the final taxable income you pay tax on — that comes after standard or itemized deductions and tax credits — but AGI affects those later calculations. The IRS explains AGI as income minus specific adjustments (see IRS guidance: https://www.irs.gov/individuals/adjusted-gross-income).

In my 15+ years helping clients, I’ve found that small adjustments can change eligibility for credits or reduce tax by shifting you under threshold limits. Below I break down what typically counts, what usually does not, real examples, practical steps to manage AGI, and common filing pitfalls.

How is AGI calculated?

Start with your gross income: all taxable income you received during the year. That usually includes wages (W-2), taxable interest, ordinary dividends, taxable retirement distributions, business income (Schedule C), capital gains, rental income, and some other items.

From that total, subtract allowed “adjustments to income” (also called above-the-line deductions). Common adjustments include:

  • Educator expenses (eligible K–12 teachers)
  • Student loan interest deduction (subject to limits)
  • Traditional IRA contributions (if deductible)
  • Health Savings Account (HSA) contributions
  • Self-employment tax deduction (half of the self‑employment tax)
  • Self-employed retirement plan contributions (SEP, SIMPLE, solo 401(k))
  • Alimony paid (for agreements before 2019)
  • Moving expenses for members of the Armed Forces

These adjustments reduce your gross income to arrive at AGI. Note: the list above is common but not exhaustive; eligibility and limits change, so always check the current IRS instructions for Form 1040 and related schedules (IRS: https://www.irs.gov/forms-pubs).

What commonly counts as income toward AGI

  • Wages, salaries, tips (Form W-2 earnings)
  • Self-employment income (Schedule C net profit)
  • Taxable interest and ordinary dividends
  • Taxable portions of pensions and annuities
  • Capital gains
  • Rental and royalty income
  • Unemployment compensation
  • Some social benefits, when taxable
  • Certain distributions from retirement accounts (to the extent taxable)

If you received an information return (W-2, 1099‑MISC/1099‑NEC, 1099‑INT, 1099‑DIV, 1099‑R), the amounts on those forms often feed into gross income and therefore AGI.

What commonly does NOT count as AGI

  • Most gifts and inheritances (generally not taxable to the recipient)
  • Life insurance death benefits (generally tax-free)
  • Child support payments
  • Certain types of employer benefits that are excluded by law (e.g., employer-provided health insurance, qualified employer retirement plan contributions)
  • Some public benefits (e.g., Supplemental Security Income) and many veterans’ benefits
  • Nontaxable portions of Social Security (if below the taxable threshold)

Remember: an item can be nontaxable generally but still affect eligibility elsewhere. For example, certain tax-exempt interest is not included in AGI but can be added back for Modified AGI (MAGI) calculations used by other programs.

MAGI vs AGI: why the distinction matters

Many tax credits and program rules use Modified Adjusted Gross Income (MAGI), not AGI. MAGI starts with AGI and then adds back certain excluded items (for example, tax-exempt interest, foreign earned income exclusions, or IRA deduction exclusions depending on the rule). Because MAGI rules vary by program (e.g., IRA contribution limits, Premium Tax Credit, or Medicaid/Marketplace eligibility), check the specific MAGI definition for each benefit (see IRS publications and program guidance).

Real-world example

Scenario: A single taxpayer, annual gross income $80,000, with the following:

  • Wages: $80,000
  • Traditional IRA contribution (deductible): $6,500
  • Student loan interest paid: $1,500
  • HSA contributions (pre-tax through employer): $2,000

Calculation (simplified):

  • Gross income: $80,000
  • Minus IRA contribution: $6,500
  • Minus student loan interest: $1,500
  • Minus deductible HSA contribution (if not already excluded): $2,000
  • Adjusted Gross Income (AGI): $70,000

Small adjustments like the IRA and student loan interest reduced AGI by $10,000 in this example — which could move the taxpayer into better credit eligibility or affect phaseouts.

Why AGI matters (concrete effects)

  • Eligibility and phaseouts for credits and deductions. Many credits (Earned Income Tax Credit, Child Tax Credit, education credits) and deductions are limited by AGI or MAGI.
  • Determines the ability to contribute directly to Roth IRAs or deduct traditional IRA contributions (through MAGI tests).
  • Affects certain tax benefits such as the deduction for medical expenses (which uses a percentage of AGI as the threshold) and the itemized deduction phaseouts.
  • Used in many non-tax contexts. Lenders and government programs often request AGI (or income tax returns) to verify income for mortgages, student aid, or public benefits.

Practical strategies to manage AGI (what I recommend in practice)

  1. Maximize eligible above-the-line deductions first. Contributing to a deductible traditional IRA, maxing HSA contributions, and funding certain self-employed retirement plans reduce AGI directly.
  2. Time income when possible. If you can defer a year-end bonus or accelerate deductible retirement contributions, you may optimize which tax year the income hits.
  3. Use tax‑deferred retirement plans at work (401(k), 403(b)) to lower taxable wages. Contributions to these plans reduce taxable wages reported on your W-2 and therefore reduce AGI.
  4. Track student loan interest and educator expenses — both are often overlooked.
  5. For self-employed taxpayers, keep disciplined expense records; legitimate business expenses reduce Schedule C net profit and AGI.

These strategies require careful planning and sometimes tradeoffs (e.g., Roth vs. traditional retirement accounts), so discuss specifics with a tax advisor.

Common taxpayer mistakes

  • Confusing AGI with taxable income. AGI is calculated before standard/itemized deductions and credits. Taxable income = AGI minus standard or itemized deductions.
  • Missing above-the-line deductions because they aren’t on the Schedule A (itemized deductions) and can be overlooked when using simplified filing or tax-software defaults.
  • Forgetting that some income items can be partially taxable (e.g., Social Security benefits) and must be calculated carefully.
  • Assuming AGI equals MAGI for program eligibility; many programs use different MAGI adjustments.

Where to find your AGI on your tax return

Your AGI appears on your Form 1040. The exact line number can change between versions of the form, so check the current Form 1040 instructions or your tax software for the correct line. The IRS provides guidance and instructions for Form 1040 at: https://www.irs.gov/forms-pubs.

Useful internal resources

These pages explain related topics that help you move from AGI to the final taxable figure and show actionable deductions many taxpayers miss.

Authoritative sources and further reading

Professional disclaimer

This article is educational and general in nature. It does not substitute for personalized tax advice. Tax laws and limits change; check current IRS guidance or consult a qualified tax professional for advice tailored to your situation.

Author: Senior Financial Content Editor, FinHelp.io
Last reviewed: 2025 (check IRS for updates cited above)