How to calculate adjusted gross income (AGI) for tax purposes
Calculating your Adjusted Gross Income (AGI) is one of the first steps in determining your taxable income for the year. Once you have determined what your adjusted gross income is, you can determine your tax payable for the year.
Here are some helpful tips on how to calculate your Adjusted Gross Income (AGI) for tax purposes.
Before you calculate your AGI, you can determine if you need to file an income tax return for the year. The Internal Revenue Service (IRS) provides an interactive tax wizard that can be used to help you determine if you need to file an income tax return for the year.
Key points to remember
- The first step in calculating your AGI is to determine your total gross income for the year, which includes your salary in addition to any income from self-employed businesses and any other income reported on 1099 forms, such as dividends. investment and retirement income.
- To arrive at your final AGI, you are allowed to subtract certain amounts from your total income. For example, teachers can deduct unreimbursed class expenses, self-employed workers can deduct insurance premiums, and anyone can deduct charitable donations.
Even if you are not required to file a tax return, the IRS recommends that you still file a tax return. This is because you may be eligible for a tax return if you have paid income tax, or you may be eligible for certain credits.??
How to calculate AGI for tax purposes
Gather your income statements
The first step in calculating your AGI is to determine your income for the year. Income can be in the form of money, goods, or services that you receive in the tax year.
Income includes your traditional wages and salaries, which are reported on the W-2 form, all income from independent businesses, and any other income reported on the 1099 forms, such as investment dividends and retirement income. Proceeds from brokerage and barter transactions reported on Form 1099-B, income from real estate transactions reported on Form 1099-S, any taxable interest reported on Form 1099-INT, and all investment dividends reported on Form 1099-DIV are all considered part of your taxable income.
In addition, you will also need to include these sources of taxable income:
- Business income
- Farm income
- Union strike pay
- Taxable refunds, credits or offsets of state and local income taxes
- Long-term disability benefits received before minimum retirement age
- Jury fees
- Security deposits and rental income
- Rewards, prizes, games of chance, lottery and contest winnings
- Salary arrears following lawsuits for discrimination at work
- Spousal support
- Unemployment benefit
- Capital gains
- Severance pay
- Income from rental real estate, royalties, partnerships, S corporations, trusts and license payments
You can calculate your total income by adding all of these amounts.
Income that is not taxed
Certain types of income are not taxable. The following sources of income do not count towards your AGI:
- Workers’ compensation benefits
- Child support benefits
- Life insurance proceeds (unless the policy was issued to you for a price)
- Disability payments
- Capital gains on the sale of your main residence
- Money received as a gift or other inherited property
- Canceled debts intended to be offered to you
- Scholarships or scholarships
- Host family payments
- Money was transferred from one retirement account to another (as long as it was executed via a trustee-to-trustee transfer)
Subtract deductions and expenses
To arrive at your final AGI, you are allowed to subtract certain amounts from your total income.
Self-employment tax deduction
As a self-employed person, you pay all of your social security and health insurance taxes. For this reason, you are entitled to an IRS credit if you claim the self-employment tax deduction.
Classroom expenses for teachers and educators
If you are a Kindergarten to Grade 12 teacher, instructor, counselor, principal or assistant for at least 900 hours per school year at a school that offers primary or secondary education, you can deduct up to 250 $ for unreimbursed work-related expenses you incur in the tax year.
Self-employed workers’ health insurance deduction
If you are self-employed, you can deduct the full amount of your premium expenses through the deduction for self-employed health insurance. This also applies if the policy covers your spouse and dependents.
Skilled performing artists and other professions
You can adjust your income if you are a qualified artist, as well as a reservist and some paying government officials.
In addition to these deductions, there are also deductions for charitable contributions and contributions to health savings accounts (HSAs).
For moving expenses, provided you are in the military, there are various costs related to self-employment, early withdrawal penalty amounts, and interest on student loans.
(In addition to health insurance premiums and half the self-employment tax, contributions to the pension scheme are also deductible for the self-employed.)
Be careful when calculating amounts for these categories, as special requirements must be met for each.
Modified AGI vs AGI
A common mistake made by inexperienced tax preparers is to use the AGI in cases where the modified AGI should be used. While your AGI is used to determine the amount of income tax you owe and certain credits for which you are eligible, your amended AGI is used to determine eligibility for other items such as the deduction of contributions to a traditional IRA and eligibility to contribute to a Roth IRA.??
Work with a professional
Unless you have the time and skills to follow the IRS’s instructions and do the necessary research, it might be more practical to use the services of an experienced tax professional. While hiring a tax professional may cost you more, it may be worth it considering the time saved and the frustration avoided of trying to figure out the rules on your own.
The bottom line
Determining your AGI may seem like a straightforward process at first glance. However, even if you use the instructions from the IRS to complete your tax return, you run the risk of making costly mistakes, especially if you are inexperienced. Even if you complete the process on your own, consider having a tax professional review your results to make sure they are accurate.