What is adjusted gross income?
Adjusted gross income (AGI) is a figure used by the US Internal Revenue Service (IRS). It starts with your gross income (wages, business profit, interest, dividends, rental income and capital gains) and subtracts certain "above-the-line" adjustments. It appears on Form 1040.
Formula
AGI = Gross income − Adjustments to income
Common adjustments
- Deductible contributions to traditional IRAs
- Half of self-employment tax
- Self-employed health insurance premiums
- Contributions to self-employed retirement plans (SEP, SIMPLE)
- Student loan interest
- Health savings account (HSA) contributions
- Educator expenses
Why AGI matters
- Taxable income is AGI minus the standard or itemised deductions.
- Eligibility for many credits and deductions phases out above certain AGI levels.
- Modified AGI (MAGI) adds back some items and is used for further tests, such as Roth IRA eligibility.
Example
A freelancer earns $70,000 of business profit and $2,000 of interest. Their self-employment tax is about $9,892, half of which ($4,946) is deductible, and they contribute $6,000 to a SEP-IRA. AGI ≈ 72,000 − 4,946 − 6,000 = $61,054.
For business owners
Sole proprietors and partners report business profit on their personal return, so clean books directly affect AGI. Accurate expense tracking lowers business profit legitimately and therefore AGI.