What Does AGI Stand For in Taxes?
Adjusted Gross Income is a key calculation that connects your earnings to your final tax bill by setting the limits for important tax benefits.
AGI stands for Adjusted Gross Income. This figure is a calculation on your annual tax return that serves as the starting point for determining your tax liability. It is not your total income, nor is it the final amount on which you are taxed. Instead, AGI is a middle ground—a measure of your income after specific adjustments have been made but before major deductions are taken. The Internal Revenue Service (IRS) uses it to test your eligibility for many tax credits and deductions.
Calculating Your Adjusted Gross Income
The calculation of your Adjusted Gross Income begins with determining your gross income. This includes all income you receive from any source, such as:
- Wages from an employer
- Dividends from investments
- Interest earned in a savings account
- Distributions from retirement accounts
- Capital gains from selling assets
- Business income if you are self-employed
- Unemployment benefits
Once you have your total gross income, you subtract certain specific expenses known as “adjustments to income.” These are often called “above-the-line deductions” because you subtract them from your gross income directly to arrive at your AGI. You can claim these adjustments whether you itemize deductions or take the standard deduction.
Common examples of these adjustments include:
- Contributions made to a traditional Individual Retirement Arrangement (IRA)
- Interest paid on student loans, up to a certain limit set by the IRS
- One-half of the self-employment taxes paid for self-employed individuals
- Contributions to health savings accounts (HSAs)
After totaling all applicable adjustments, you subtract this amount from your gross income, and the result is your AGI.
The Role of AGI in Your Taxes
Your Adjusted Gross Income acts as a gatekeeper for many tax benefits. The IRS establishes income-based limits for a wide array of tax credits and deductions, meaning your eligibility for, or the amount of, a tax break can depend directly on your AGI or a related figure, Modified Adjusted Gross Income (MAGI). A lower income can increase your access to these benefits, potentially reducing your overall tax bill.
This system often works through “phase-outs,” where the value of a tax credit or deduction begins to decrease once your income surpasses a certain threshold. For example, the ability to deduct contributions to a traditional IRA is phased out based on MAGI for taxpayers covered by a workplace retirement plan.
Similarly, education credits like the American Opportunity Tax Credit have MAGI limits that can reduce or eliminate the credit for higher-income individuals. The Child Tax Credit is another benefit tied to MAGI. As a taxpayer’s income rises above a specific level, the amount of the credit they can claim is systematically reduced. These income thresholds are set by tax law and can be adjusted for inflation.
AGI vs Modified AGI and Taxable Income
It is common to confuse AGI with Modified Adjusted Gross Income (MAGI) and taxable income. MAGI starts with your AGI but adds back certain deductions you previously subtracted, such as student loan interest and tax-exempt interest. The specific calculation for MAGI can vary depending on the tax benefit it is being used for, but it is frequently used to determine eligibility for contributing to a Roth IRA and for qualifying for certain tax credits.
Taxable income is the figure used to calculate your tax liability. It is determined by taking your AGI and subtracting either the standard deduction or your total itemized deductions, whichever is greater. Itemized deductions include expenses like mortgage interest, state and local taxes, and charitable contributions. Therefore, AGI is an intermediate step you calculate first to find your taxable income.