You’ve heard of income, gross income and even taxable income — but what about adjusted gross income?
Adjusted gross income, also known as AGI, is essentially gross income minus certain expenses. These certain expenses are called “adjustments,” and they differ depending on your situation. They can also have various impacts on your tax outcome since they can lower your taxable income.
Here’s what to know about adjusted gross income — plus a few key trends to keep an eye on for the upcoming tax year.
Top Trends in the World of Adjusted Gross Income
Adjusted gross income, like just about everything in the financial world, responds to global trends. The TurboTax Tax Trends Report takes a close look back at these relationships in tax year 2021 and gives insight into what they mean for your wallet — and your taxes.
Here’s a quick overview of the report’s findings:
Adjusted Gross Income Increases
The median AGI increased 10.2% in 2021 compared to 2020. However, the growth is significantly lower when considering the rise in consumer prices. When adjusting for inflation using the average CPI-U for 2020 and 2021, that’s a 5.3% increase in AGI year-over-year.
Different Ages, Different Adjusted Gross Income
Among all filing statuses, it was young, single tax filers who were most likely to see an increase in adjusted gross income. For filers between ages 35 and 45, that increase was 9.8% compared to 2020. This group was also the least likely to see a decline in AGI.
Trends were different for filers of other ages. For example, the 45 to 55 age group saw growth of only 5.8%, while the 55 to 65 age group saw 3.9%.
Although the exact numbers vary, one thing’s for sure: AGI growth was observed across all U.S. regions. Single filers saw the highest median AGI growth in the Midwest — that was a 17.5% increase in 2021 ($31,000) compared to 2020 ($26,400). Meanwhile, for those in the “Married Filing Jointly” category, the West was best: They saw an increase of 6.7% in 2021 ($108,000) compared to 2020 ($101,000).
It’s true that 2021 had some big AGI wins. Unfortunately, inflation increases expenses, which cuts into household earnings. That means you might not feel those adjusted gross income boosts.
The good news is that, when it comes time to file your tax year 2022 taxes, you may have some new options. For example, you may be able to take advantage of tax benefits passed under the Inflation Reduction Act and other tax benefits adjusted for inflation to save money on your taxes. You may also be eligible for the Earned Income Tax Credit and other income-based tax benefits if you have lower income due to unemployment or other hardships.
Wait — What’s Adjusted Gross Income?
Now that you know what to expect from the coming year, it’s time to take a closer look at what adjusted gross income really means. Let’s start with the first piece of the puzzle: gross income.
Gross income is the amount you earn before taxes, deductions or expenses. It can include:
- Capital gains.
- Business income.
- Retirement distributions.
Lucky for you (and your wallet), all of this money may not be taxable. To find out how much of your gross income is taxable income, one of the first things you’ll need to do is consider relevant adjustments.
Adjustments are expenses that reduce your overall income, helping you calculate how much money is actually taxable. You’ll be eligible for various adjustments depending on your financial situation. The most common adjustments are self-employed health insurance and 50% of self-employment tax for business owners and independent contractors. Other examples include:
- IRA contribution deductions.
- Student loan interest.
- Educator expenses.
- Alimony payments from pre-2019 divorce decrees.
Once these adjustments have been calculated and subtracted from your gross income, you arrive at the magic number: adjusted gross income.
Keep in mind that AGI doesn’t include the reductions from itemized or the standard deduction or certain exemptions, which means it’s still not your final taxable income. You would take your AGI plus certain adjustments to arrive at modified adjusted gross income.* In turn, MAGI less the standard deduction or itemized deductions (whichever one you qualify for) give you your taxable income.
Your modified adjusted gross income is important because the IRS uses this amount to see if you qualify for specific tax benefits. A major one is your Individual Retirement Account (IRA). It can determine if you can contribute to a Roth IRA and if you can deduct any of your contributions to a traditional IRA.
*Modified Adjusted Gross Income (MAGI) is your AGI with certain adjustments to income added back like your student loan interest, IRA contributions, and qualified tuition expenses. Depending on your situation, most will find their AGI is identical to their MAGI or very close to each other.
Adjusted Gross Income and Your Taxes
Adjusted gross income is an important number — not just because it helps you find out how much of your money is taxable income, but because it gives the Internal Revenue Service (IRS) one more way to verify your identity.
That’s right: Before you can electronically file your tax return, you may need to find and include your AGI from your previous year’s tax return. Your AGI can be found on line 11 of your IRS 2021 Federal Form 1040 and Form 1040-SR. If you are a returning TurboTax customer your previous year’s AGI will automatically transfer over so you won’t need to look it up.
AGI has another role to play, too: It helps determine whether you’re eligible for certain deductions and credits, sometimes increasing your tax refund or reducing your tax bill.
How To Calculate AGI
Adjusted gross income is calculated by starting with all your gross income for the tax year. Remember, this includes everything the IRS considers taxable — so don’t forget unemployment compensation, interest income, tips and other types of income are included (hint: You’re looking for “gross income” here).
Once all of your income is totaled, it’s time to consider adjustments. These are determined based on your financial situation over the past year. For example, if you put aside some of your income and contributed to an IRA, you may be able to deduct your contribution as an adjustment to income lowering your taxable income.
Make Adjusted Gross Income a Breeze
When it comes to adjusted gross income, the most important thing you can do is understand how this number impacts your taxable income — and, by extension, your taxes. There’s a lot to know, and it all changes depending on where and how you spent your money in the past tax year (plus a few updated rules from the IRS). As such, it’s understandably difficult to keep track of every little detail in the AGI world, especially with economic and financial trends to consider.But you don’t have to.
Don’t worry about knowing these tax rules. You can come to TurboTax and get your taxes fully prepared by a TurboTax Live Full Service tax expert in one meeting while the tax expert prepares your taxes. TurboTax Live tax experts are available in English or Spanish year-round and you can connect with the same trusted tax expert the following year.
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