The Internal Revenue Service has a few ways to measure a taxpayer’s financial situation. One of these ways is the adjusted gross income, enabling the IRS to understand your actual earnings appropriately.
Undoubtedly, your gross income is the total amount you’ve earned, but what about that $5,000 IRA contribution you’ve made? Is that something that really should as your income or stay out of it? This is why the Internal Revenue Service has adjusted gross income as means to measure your actual income to figure out eligibility for certain tax deductions and credits. If your AGI is too high, you may not be eligible to receive certain tax deductions or credits in full – get them partially. So it’s essential to calculate adjusted gross income, and often mandatory to figure out the mentioned points.
How to calculate adjusted gross income?
Calculating adjusted gross income is very straightforward and doesn’t require much knowledge of the United States tax code. All you need is basic math or just a calculator. Figure out your adjusted gross income by filling out Schedule 1, Additional Income and Adjustments to Income. This tax form is for reporting the additional income earned other than the income reported on information returns and claiming certain deductions known as adjustments.
As mentioned in the example above, the IRA contributions are one of those deductions. Depending on your modified adjusted gross income (yes, there is another way to measure certain things) and whether or not a retirement plan at work covers you and/or your spouses, you can deduct all of your contributions. Use the IRA deduction calculator to see if you can lower your adjusted gross income.
This also answers another most commonly asked question about this topic. Your AGI is not shown on the Form W-2 you get from your employer. You must get the gross income reported on Form W-2 and total it with other income you’ve earned and fill out Schedule 1 to come up with your adjusted gross income. It’s a process that you need to take for yourself. After you figure out AGI, enter it on your federal income tax return, and calculate your taxable income, which is two different things.