What Is Adjusted Gross Income (AGI) and Why Does It Matter?
When you file your taxes, you’ll hear a lot about Adjusted Gross Income (AGI)—but what exactly is it, and why is it so important? Let’s break it down!
🔎 What Is AGI?
Adjusted Gross Income (AGI) is your total gross income (everything you earn) minus certain deductions or adjustments allowed by the IRS. It’s a key figure because it determines your taxable income, which affects how much you owe in taxes.
💰 What’s Included in AGI?
Your AGI starts with your gross income, which includes:
Wages, salaries, and tips
Self-employment income
Investment income (like dividends, interest, and capital gains)
Rental income
Retirement income
Unemployment benefits
Then, you subtract adjustments such as:
Student loan interest
Retirement contributions (like IRA or 401(k) contributions)
Health savings account (HSA) contributions
Self-employment expenses
These adjustments reduce your gross income to calculate your AGI.
📊 Why Does AGI Matter?
Your AGI is important because:
Tax Brackets: AGI helps determine which tax bracket you fall into, affecting your overall tax rate.
Eligibility for Credits & Deductions: Many tax credits and deductions are based on your AGI. For example, the Child Tax Credit and Education Credits phase out at higher AGIs.
Determines Taxable Income: Once you subtract your AGI from any other deductions (like the standard or itemized deductions), you get your taxable income—the amount you’re actually taxed on.
📉 How to Lower Your AGI
To lower your AGI (and potentially reduce your taxes), you can:
Contribute more to tax-deferred accounts like 401(k)s or IRAs
Take advantage of HSA contributions
Deduct student loan interest
If you’re self-employed, deduct eligible business expenses
✅ Pro Tip: Keep track of your income and expenses throughout the year, and consider working with a tax pro to optimize your AGI and minimize your tax liability.