Eligibility for the various stimulus packages cooked up by our government depend on your income. Just to make it confusing, it’s not based on your total income or your taxable income. Instead they use a figure known as your Adjusted Gross Income or AGI. This always leaves me scratching my head, I have no idea what my AGI is!
What is AGI?
Adjustable gross income is your total income minus certain allowable adjustments. Adjustments are different than deductions or credits. These adjustments include:
- Educator Expenses
- Health Savings Accounts (HSAs)
- Moving Expenses
- Alimony Paid
- IRA
- Student Loan Interest
It also includes adjustments that were made before you received your paycheck, your health insurance and 401k investments for example. It does not include exemptions, like you claim for yourself and your kids. Nor does it factor in deductions like mortgage interest or charitable donations. Instead exemptions and deductions factor into how much income you are taxed on.
What is AGI Used For?
Your adjusted gross income is used in many calculations and determines whether you qualify for various deductions and credits. The stimulus checks mailed out by the Bush administration last year and the current government’s plan to reduce taxes depend on your AGI. If you make too much according to your AGI, then you are not receiving any of these tax breaks (me for example).
Many tax credits and deductions are subject to an income test, if your AGI is above the limit your credit or deduction is reduced. For example AGI is used to determine how much personal exemption you can claim, whether you can even deduct your student loan interest and whether you can claim certain education credits. It is also used to calculate how much medical and business expenses you can deduct. Your ability to deduct IRA investments or contribute to a ROTH IRA are dependent on your income. The Earned Income Tax Credit (EIC) is based on AGI as well. For all of these reasons, you want your AGI to be as low as possible.
How to Determine your AGI
It’s tax season, perfect time for figuring out your adjusted gross income. Rather than trying to calculate your AGI, grab your latest tax return. Your AGI is listed on:
1) 1040 EZ – Line 4
2) 1040A – Line 21
3) 1040 – Line 37
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6 comments:
Thank you, I was doing work related to this and while TurboTax did it for me - your post helped explain what it was doing.
I don't know why our tax system has to be so overly complex where I have to calculate, X salary minus (A+B+C+D) deductions + Z "other income", just to figure out what my AGI is. Sigh.
Great post! I am going to share it with my readers.
AGI has absolutely killed me this year. It is just too high to qualify for a lot of deductions and credits that I could normally take (student loan interest and IRA dedcutions) and put me in a category where I will most likely benefit very little from the new stimulus package.
Nice post - good information here! Thanks for sharing.
Yeah, I've always been confused by that.
Thanks for the info!
The only thing gross about my income is the taxes that come out of it. Zing!
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