Adjusted gross income (AGI) is an individual’s total gross income minus specific deductions. It is used to calculate taxable income, which is AGI minus allowances for personal exemptions and itemized deductions. For most individual tax purposes, AGI is more relevant than gross income.
Gross income is sales price of goods or property, minus cost of the property sold, plus other income. It includes wages, interest, dividends, business income, rental income, and all other types of income. Adjusted gross income is gross income less deductions from a business or rental activity and 21 other specific items.
Several deductions (e.g. medical expenses and miscellaneous itemized deductions) are limited based on a percentage of AGI. Certain phase outs, including those of lower tax rates and itemized deductions, are based on levels of AGI. Many states base state income tax on AGI with certain deductions.
Adjustments
Gross income is reduced by certain items to arrive at adjusted gross income. These include:
- Expenses of carrying on a trade or business including most rental activities (other than as an employee)
- Certain business expenses of teachers, reservists, performing artists, and fee-basis government officials.
- Health savings account deductions.
- Certain moving expenses.
- One-half of self-employment tax.
- Allowable contributions to certain retirement arrangements (SEP IRA, SIMPLE IRA, and qualified plans) and Individual Retirement Accounts (IRAs).
- Penalties imposed by financial institutions and others on early withdrawal of savings.
- Alimony paid (which the recipient must include in gross income).
- College tuition, fees, and student loan interest (with limitations and exceptions).
- Jury duty pay remitted to the juror’s employer.
- Domestic production activities deduction.
- Certain other items of limited applicability.