Adjusted Gross Income (AGI) is calculated from the gross income and represents the net amount of income earned by an individual in a year including wages, capital gains, and retirement distributions, etc. after deducting above-the-line deductions. We use it to find out the taxable income of the individual, which is a way of determining deductions or credits a person is eligible to receive.

### Explanation

Adjusted gross income is a modified version of gross income as the is the total amount of money earned by an individual in a year, including , wages, capital gains, rental income, etc. In contrast, there are some above-the-line deductions in the calculation and therefore, more useful for the individual who pays tax as it makes the individual eligible to receive deductions and credits.

For eg:

### How to Calculate Adjusted Gross Income?

The first step in calculating the adjusted gross income is finding out the accurate gross income of the individual by adding other sources of income to the total income earned in a particular year. Other sources of income include unemployment compensation, social security payments, profit from the sale of the estate, pensions, and so on.

On ascertaining the gross income, we deduct above-the-line deductions from it. are the deductions applicable to the taxpayer; we can find a complete list of such applicable deductions on the website of Internal revenue service (IRS). After deducting these applicable deductions from the gross income, the resultant value is the adjusted gross income (AGI).

### Example of Adjusted Gross Income

Suppose, an individual breaks down the deductions and summary ophthalmology expenses which can’t be repaid by insurance. The individual may have grabbed a deduction of the ophthalmology expenses surpassing the mark of 10% of average gross income for the year 2018.

If the individual reports about the unrepaid amount of \$12,000 as the ophthalmology expenses while having an average gross income of \$100,000, then he must reduce the deductions by the amount of \$7500. Doing so will leave the individual with \$4,500 deduction. And if the average gross income of the individual is \$50,000, then the individual has to reduce \$3,750 ending up with an \$8,250 deduction.

### Implications

The adjusted gross income AGI, calculated by deducting applicable deductions from the gross income, has a significant impact on the deductions and credits, as due to it an individual can get deductions and credits on the tax return. The value of these deductions and credits depend upon the average gross income, which means if the AGI is low, the individual will enjoy more deductions or credits and vice-versa.

### Benefits

• Helpful in finding the taxable income: The adjusted gross income helps in finding the accurate of an individual as the applicable deductions are deducted from the gross income in it.
• A source of deductions and credits: It helps individuals by making them eligible to receive deductions and credits.
• Legal acceptance: The adjusted gross income is calculated on Form 1040 (on the very first page of the U.S federal tax return by using the information from schedule 1).

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