Adjusted gross income (AG) is a measure of income used by the Internal Revenue Service (IRS) to determine a taxpayer’s tax liability. Simply put, it is calculated by subtracting certain adjustments from gross income. Deductions may include alimony paid, student loan interest paid, and other expenses. Your AGI is an important metric when it comes to paying taxes that can also affect your eligibility for retirement plan contributions such as a Roth individual retirement account (Roth IRA).
AGI, which is defined in the United States Tax Code, is a highly significant number in tax calculations. In addition to determining a US taxpayer's tax bracket, the Adjusted Gross Income (AGI) also establishes their eligibility for specific tax benefits and plans. Moreover, many US states utilize the AGI model from federal tax returns to calculate how much a taxpayer owes in state income taxes. In these cases, the AGI number is typically modified further with state-specific credits and adjustments.
In order to determine one’s AGI, certain deductions are calculated from your total gross income. Your gross income generally includes all of the money you earned during the recent tax year from different sources, such as wages, salaries, tips, dividends, and royalties. Social security, pensions, real estate and unemployment are additional standard sources of gross income. Lastly, once you have calculated your gross income, certain deductions are subtracted to arrive at your AGI. Common examples of these deductions include contributions to traditional IRA, student loan interest paid, alimony paid and some business expenses.
As previously stated, an individual's taxable income is calculated based on AGI. To calculate taxable income, the taxpayer starts with their AGE and then subtracts either standard deduction or itemized deductions - whichever is greater. Your taxable income is what you will use to determine your tax bracket and figure out how much will be subject to the applicable tax rate.
In conclusion, Adjusted Gross Income (AGI) is the starting point for determining a US taxpayer’s taxable income. Understanding AGI is essential for accurate tax planning and preparation. By knowing how it is calculated and how it affects your tax liability, you will be able to make better informed decisions this tax season. Further, seeking professional legal assistance can provide individuals with expert guidance in navigating their taxes. Connect with a top tax lawyer in your area today with Attorney At Law.