Adjusted Gross Income on Taxes

What’s modified Adjusted Gross Income

Adjusted Gross Income, abbreviated as AGI is simply your total or gross income adjusted for specific “above-the-line” deductions to determine which tax benefits a taxpayer is eligible for. The Adjusted Gross Income may include wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources.

Does adjusted gross income include 401k

Common “Above-the-line” includes  401(k) contributions, Health Savings Account(HSA) contributions, and educator expenses.

Each taxpayer has a unique AGI which may vary from one year to the next. AGI is prominently found on page 1, line 11 of form 1040.

Adjusted Gross Income w2

What’s AGI on W-2?

AGI is a calculated amount and W-2 is the documentation provided by the employer showings taxes withheld on salaries.

The question keeps being asked due to confusion in tax terminology when talking about income. Understanding the terminologies below can assist in telling what AGI is and what it isn’t.

• Gross Income – This includes the total income earned from all sources within a tax year, and could include money, property, and the value of services received. Gross income is then reduced by adjustments and deductions to arrive at taxable income. Wages, tips earned, interest from investments, dividends, rents collected, and pension income are examples of sources that contribute to your gross income.
• Taxable Income – This is the AGI less either the standard deduction or the total of itemized deductions and is used to determine your tax bracket.
• Modified Adjusted Gross Income (MAGI) – This is the AGI plus a few added back items. MAGI calculations start AGI and then certain deductions like student loan interest are added back.

MAGI will determine a taxpayer’s eligibility for certain deductions, credits, and retirement plans.

Taxpayers without complicated financial transactions will find that their AGI and MAGI are the same numbers or very close.

Formula for Adjusted Gross Income

How does AGI affect Deductions

An example is a taxpayer having met a huge dental bill out of pocket and deciding to itemize these expenses that exceed 7.5% of the taxpayer’s AGI. If the actual bill was $12,000, and the taxpayer has an AGI of $100,000, they can only deduct amounts exceeding $7,500, which is $4,500.

Adjusted Gross Income limit for Roth IRA

Contribution is based on income level. Your MAGI (worked out from the AGI) is used to determine the amount to be contributed, and eligibility for contribution to Roth IRA in a given year.

To determine eligibility for Roth IRA contributions, the following adjustments will be added back to the AGI to get MAGI;

• Student loan interest,
• Foreign earned income,
• Foreign housing deductions,
• Excluded savings bond interest, and
• Excluded employer adoption benefits

To be eligible for a Roth IRA contribution, the MAGI for single filers must be under $153,000 for the tax year 2023( $144,000 for the tax year 2022).

For married and filing jointly, MAGI must be under $228,000 for the tax year 2023 ($214,000 for the tax year 2022).

Adjusted Gross Income limit for Charitable Contributions

2022 charitable contribution limits AGI

The maximum charitable deduction taxpayer can take in a specific tax year is based on a percentage of their AGI. This is as follows;

• Non-cash assets held for more than one year are limited to 30% of the AGI.
• Cash gifts are limited to 60% of your AGI.
• Qualified contributions are not limited and are allowed up to 100 percent of the AGI.

Charitable contributions are taken as an itemized deduction in Schedule A.

Large donations that exceed the set AGI limit may be carried over to five subsequent tax years.

Charitable donations tax deduction limit 2021 AGI

Parts of the CARES Act of 2020(and extended to 2021) provided two Temporary tax benefits for taxpayers to encourage individual donors to make cash deductions to qualifying public charities.

• For cash contributions made in 2021, you can elect to deduct up to 100 percent of your AGI (which was 60 percent prior to the CARES Act and reverted back in 2022).
• Donors can make a deduction for a certain level of cash contributions even if they don’t itemize 2021 income taxes. Since the charitable write-off is not an “above-the-line” deduction it doesn’t affect the AGI. It’s not an itemized deduction, either.

Single taxpayers can claim a tax write-off for cash charitable gifts up to $300 and married couples filing together may get up to $600 for 2021.

Bottom Line

AGI does not represent the actual income earned in a specific year, rather it’s a tax concept.

It helps determine;

• A Taxpayer’s eligibility for several valuable tax benefits
• Liability for certain taxes, such as the net investment income tax.

While most commercial tax software can easily calculate AGI, it’s worth knowing how it works so that you can ensure you qualify for as many tax benefits as possible.