What is Adjusted Gross Income ?
1399 Views · Updated December 5, 2024
Adjusted Gross Income (AGI) is the financial metric used by tax authorities to establish an individual's or a business's income tax liability. To calculate AGI, certain adjustable items such as business expenses and student loan interest are subtracted from the gross income. After AGI is determined, deductions are subtracted from it to find the taxable income. Additionally, the IRS utilizes other income metrics like Modified Adjusted Gross Income (MAGI) for specific tax programs and retirement accounts.
Definition
Adjusted Gross Income (AGI) is a financial metric used by tax authorities to determine an individual or business's income tax liability. AGI is calculated by subtracting certain allowable adjustments, such as business expenses and student loan interest, from gross income.
Origin
The concept of Adjusted Gross Income originated in U.S. tax law to provide taxpayers with a more accurate measure of income for fair tax calculation. As tax laws evolved, the method for calculating AGI has been refined.
Categories and Features
Calculating AGI involves deducting specific adjustments from total income, including but not limited to: business expenses, student loan interest, and contributions to retirement savings accounts. AGI serves as the basis for determining taxable income, affecting applicable tax rates and eligibility for tax benefits.
Case Studies
Case Study 1: A company reduced its taxable income by deducting significant business expenses from its total income when calculating its AGI. Case Study 2: A student reduced their tax burden by deducting student loan interest, thereby lowering their AGI.
Common Issues
Common issues include misunderstandings about which items qualify as adjustments and how to correctly calculate AGI. Taxpayers often confuse AGI with gross income, leading to incorrect tax filings.
Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation and endorsement of any specific investment or investment strategy.