Adjusted gross income is the gross income which includes wages and dividends, capital gains as well as business income and other income less certain payment you have done such as interest payment to a traditional individual retirement account or a health savings account. Financeshed brings a complete understanding of adjusted gross income and its calculations and in what ways this affects your income.
What is Adjusted Gross Income?
Adjusted gross income is a measure of income calculated from your gross income and adjusted in order to determine how much of your income is taxable. In other words, adjusted gross income is the extension of gross total income where you need to sum up your yearly earnings. The only difference is that adjusted gross income deducts the allowable deductions in order to get the net taxable value and deriving tax payable.
How does Adjusted Gross Income affect you?
In order to understand your tax liability, you need to start from calculating adjusted gross income. Once you are able to know the value of your adjusted income you have to make various adjustments and subtract your allowable deductions to find the amount on which you’ll pay tax which is your net taxable income on which you are liable to pay tax. It is possible that your state tax return might use your adjusted gross income as a starting point. Adjusted gross income is not only useful for calculating tax liability but also makes you eligible for many deductions and credits. You can able to deduct unreimbursed medical expenses, but only when they’re more than 7.5% of your AGI and other specified criteria. Also while filing tax online the software calculates your adjusted gross income automatically. All in all, you are able to get deductions based on your AGI and thus the lower it is the higher the deductions.
How to Calculate Adjusted Gross Income?
Not all the income earned by you is fully taxed and to have it proved here are some formulas for calculating adjusted gross income. You have to start with the gross income and subtract the available deductions in order to get a net taxable income.
Adjusted Gross Income (AGI) = Gross income less Adjustments
Taxable Income = Adjusted Gross Income less Exemptions less Deductions
Thus in order to reach the taxable income, you have to first calculate adjusted gross income.
Analysis related to Adjusted Gross Income
Gross income is the sum of everything an individual earns in a year including wages, dividends, capital gains, interest income, royalties, and rental income. Adjusted Gross Income is more useful than gross income for individual tax activities. The deductions taken here are taken into account before tax exemptions for military service, dependent status, etc.
Important deductions and adjustments while calculating adjusted gross income
- Capital loss i.e. losses on sale or exchange of property
- School fees, tuition fees and interest on students loan subject to some limits
- Part of self-employment tax
- Contribution to retirement benefit schemes
- Regular expenses related to business activities performed
- Alimony or related income