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What Is Adjusted Gross Income

4 min read

Last Updated: April 4, 2025

Table of contents

Key Takeaways

Adjusted gross income refers to all the money you’ve received within a tax year minus some specific expenses.
The IRS bases the amount of income tax you owe each year on your adjusted gross income.
Your adjusted gross income may also affect the size of the tax deductions you could receive each year.

When you apply for credit cards or installment loans, you may have to provide your annual gross income. However, your adjusted gross income (AGI) matters more for tax purposes. The Internal Revenue Service (IRS) uses your AGI to find your taxable income and award tax benefits. Understanding your AGI could help you prepare for tax season.

Definition of adjusted gross income

According to the IRS, adjusted gross income refers to your total gross income minus any adjustments. Your gross income includes all the money you receive in a year from any source, per the United States Internal Revenue Code.

The IRS subtracts specific costs from your gross income to determine your taxable income. Your AGI should offer a more accurate picture of your financial circumstances. Ideally, you wouldn’t owe more taxes than you could manage.

The IRS lists the following common adjustments on Tax Form 1040, along with many others:

Student loan interest deduction
Self-employed health insurance deduction
Educator expenses
Health savings account deduction
Penalty on early withdrawal of savings
Deductible part of self-employment tax
Alimony received or alimony paid

Note that you may have extra forms or schedules to fill out when taking a tax deduction.

Definition of modified adjusted gross income

Certain tax forms and government programs might require your "modified adjusted gross income" or MAGI. This might come up when you're figuring out how much you can contribute to a Roth IRA or applying for health insurance through the Affordable Care Act's Health Insurance Marketplace^®.

Usually, MAGI is the same as or close to your AGI, with a few changes. The Health Insurance Marketplace^® explains that some amounts you subtract from your AGI get added back for MAGI. Different programs might ask for different modifications. That means your MAGI can vary.

How to calculate your adjusted gross income

You can calculate AGI by subtracting all relevant adjustments from your gross income. If you use tax filing software, you don’t have to do the math yourself. However, it’s helpful to understand how the calculation works. To find your AGI, you might break the calculation into the following steps:

Gather documentation related to your income and adjustments. That includes IRS form 1099, W-2s from your employer, and proof of certain expenses.
If you have multiple jobs or gigs, add up your annual wages.
Add income from sources like pensions, unemployment, or social security benefits to determine your gross income.
Assess your expenses from the tax year to find possible adjustments. Add them up.
Subtract the total value of your adjustments from your gross income. The remaining amount is your AGI.

Why adjusted gross income is important

Your AGI is usually the foundation for your taxes. The IRS takes tax deductions from your AGI, reducing your taxable income. Eligible deductions may include state and local income tax payments, charitable donations, and mortgage interest. Some deductions can only take a maximum percentage of your AGI.

If you don’t qualify for a lot of deductions, you may choose the standard deduction available to many taxpayers. However, if you have made many charitable contributions or paid substantial income taxes, you may choose itemized deductions instead. The best option will depend on your specific circumstances each year.

Did you know?

Your AGI is important for tax purposes, but your gross income can play a role financially in other ways. Your income may be a factor in determining what credit cards you qualify for.

As part of the credit card application process, some credit card issuers may ask for your gross income or your net income. Your net income is how much you bring home after you pay taxes, insurance, and retirement contributions from your paycheck. Keep this in mind if you’re applying for a new credit card.

The bottom line

Your adjusted gross income plays a vital role in determining the size of your tax bill or even your refund. It gives the IRS more insight into your finances than your gross income alone. Many specific adjustments or deductions could affect your taxable income. Understanding how they work can help you prepare when tax season comes around.

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