What Is Recomputed Federal Adjusted Gross Income?

Recomputed federal adjusted gross income is a modified version of a taxpayer’s standard adjusted gross income (AGI). This figure starts with the AGI from a federal Form 1040 and is altered through specific additions and subtractions. Its purpose is to create a standardized income baseline for certain tax calculations at both the state and federal levels, particularly in situations involving multi-state or special foreign income.

When the Recomputation is Required

One of the most common scenarios to recompute federal AGI involves state taxation for individuals who are nonresidents or part-year residents. States require this calculation to determine a taxpayer’s total income from all sources. This figure is then used as a baseline to fairly apportion how much of that income can be taxed by that specific state, ensuring tax is only levied on the appropriate portion.

Another situation is at the federal level for taxpayers working abroad and claiming the Foreign Earned Income Exclusion on Form 2555. This exclusion allows U.S. citizens and residents to exclude a significant portion of their foreign-earned income from U.S. tax. The recomputation ensures that the income that remains subject to tax is taxed at an appropriate rate, preventing taxpayers from receiving the dual benefit of both excluding income and having their remaining income taxed at lower marginal rates.

Calculating Recomputed Federal Adjusted Gross Income

The calculation process begins with the adjusted gross income reported on line 11 of the taxpayer’s federal Form 1040. This figure represents gross income minus certain “above-the-line” deductions. From this baseline, a series of modifications—additions and subtractions—are made, with the exact adjustments dictated by the rules of the government entity requiring the calculation.

Common Additions to AGI

The most frequent adjustments are additions that add back certain deductions or income types excluded from federal AGI. A primary example is the deduction for state and local taxes (SALT). While up to $10,000 in these taxes can be deducted federally, states require this amount to be added back to prevent a deduction for taxes paid to that same state.

Another common addition is interest income from municipal bonds issued by other states, which is federally tax-exempt but taxable by a different state. Other additions can include specific federal deductions that a state has chosen not to conform to, such as special depreciation on business assets or certain contributions to college savings plans.

Common Subtractions from AGI

Conversely, certain items of income included in federal AGI may be subtracted. The most prevalent subtraction is for interest earned on U.S. government obligations, such as Treasury bonds. While this interest is subject to federal income tax, it is constitutionally exempt from taxation at the state level.

Further subtractions often relate to retirement and pension income. Many states offer partial or full exemptions for income from public pensions, military retirement plans, or Social Security benefits that might be partially taxable on the federal return. Taxpayers eligible for these state-specific benefits subtract the qualifying income amounts.

Application on State Tax Returns

Once calculated, the recomputed federal AGI helps determine the state tax liability for nonresidents and part-year residents. This figure serves as the denominator in an apportionment formula, while the numerator is the income derived specifically from that state. The formula is: State-Sourced Income ÷ Recomputed Federal AGI.

This fraction produces an apportionment percentage. The state then calculates the tax as if the individual were a full-year resident, using their total income to determine an initial tax liability. This preliminary tax amount is then multiplied by the apportionment percentage to arrive at the final tax owed to that state.

This method correctly situates the person within the state’s tax bracket structure based on all their earnings. It prevents nonresidents from benefiting from lower tax brackets that would apply if only their state-specific income were considered for rate-setting purposes.

Role in Foreign Earned Income Exclusion

The recomputed AGI is also a factor in federal tax calculations for those claiming the Foreign Earned Income Exclusion on Form 2555. This exclusion allows eligible taxpayers to remove a significant amount of foreign-earned income from their taxable income, up to $130,000 for tax year 2025. The recomputation is used to calculate the tax on any remaining, non-excluded income.

The tax code requires that the non-excluded income be calculated at the marginal rates that would have applied if the excluded foreign income were still part of the AGI. To do this, the tax is first figured on the recomputed total income, including the excluded amount. Then, the tax is figured only on the excluded amount, and the difference between these two tax figures becomes the final tax liability.

This process ensures the taxpayer’s non-excluded income is taxed at the higher rates it would have been subject to without the exclusion. For example, a taxpayer with $160,000 of total income who excludes $130,000 will have their remaining $30,000 of income taxed at the rates applicable to income between $130,001 and $160,000. This prevents the exclusion from also providing the secondary benefit of a lower tax bracket.