Adjusted gross income is a financial measure of determining how
much of the gross income you earn is taxable. This article will help in
understanding this concept and also in calculating this measure.
We all are aware of the term gross income. For people who are not,
gross income is the total income of a person prior to tax deductions and
interest payments. Gross income includes wages, interest income, income
from retirement accounts, rental income, capital gains, alimony amount,
unemployment compensation, farm income and royalty income. This amount
is also known as pre tax net sales less cost of sales.
Adjusted Gross Income Definition
An adjusted gross income (AGI), in simple terms, is a fraction of the gross income earned, that determines how much percentage of it is taxable. This term can be defined as a chunk of the gross income calculated after deducting enumerated deductions like medical expenses, unreimbursed business expenses, moving expenses, IRA (Individual retirement Account) deductions, alimony and deductible retirement plan contributions. AGI is often known as the net income which is used in tax calculations after the tax credits and payments are looped into the gross income.
This figure is used by IRS (Internal Revenue Service) to determine a tax payer's eligibility to avail certain tax benefits. Lower the AGI is, higher are the benefits availed by the taxpayer. Say for instance, you are a teacher and you have just moved to a new place. If you deduct the moving expenses and cost of supplies required for your classroom teaching, these deductions will lower your AGI. However they can be shown as tax deductible expenses and can fetch you tax refunds.
On Form 1040 (Standard US Income Tax Return), The AGI section is the last number on the first page of the form. Precisely, AGI decides your income tax liability that includes tax bracket and qualification credits. The IRS also has an adjusted gross income calculator (AGI calculator) that will aid in the calculation.
Modified Adjusted Gross Income
Modified Adjusted gross income (MAGI), or modified gross income is not the same as AGI. MAGI is the amount of income which is calculated by adding certain deducted expenses (passive income like student loan deductions, student tuition fees, taxable social security, self employment tax, IRA contribution deductions, higher education costs, foreign income and foreign housing deductions) to the AGI. This income determines how much percentage of the individual's contribution towards IRA is deductible and whether the tax payer is eligible to avail tax benefits (like social security benefits, traditional IRA contributions and some tax deductions) or not. So higher this MAGI amount, the deductible amount of IRA's contribution reduces. Remember, this amount is not tax deductible. Also, many a time, this amount is either higher than or nearly same as the adjusted gross income. However there is a benchmark on MAGI, as all these benefits are quantified by limits. If MAGI is quite high, a person may not be eligible to avail the benefits.
So if you want to find out your adjusted gross income for the current financial year, take into account the AGI of the previous financial year. Once, you are done with calculation of AGI, the next concern is calculating MAGI. Make a checklist of all deductions that need to be added to your current AGI. And make sure that the deductions that are added to your MAGI do not exceed a certain limit as a high amount of MAGI cannot earn you tax refunds.
By Narayani Karthik
Published: 8/12/2010
Read more at Buzzle: http://www.buzzle.com/articles/what-is-adjusted-gross-income-agi.html
Adjusted Gross Income Definition
An adjusted gross income (AGI), in simple terms, is a fraction of the gross income earned, that determines how much percentage of it is taxable. This term can be defined as a chunk of the gross income calculated after deducting enumerated deductions like medical expenses, unreimbursed business expenses, moving expenses, IRA (Individual retirement Account) deductions, alimony and deductible retirement plan contributions. AGI is often known as the net income which is used in tax calculations after the tax credits and payments are looped into the gross income.
This figure is used by IRS (Internal Revenue Service) to determine a tax payer's eligibility to avail certain tax benefits. Lower the AGI is, higher are the benefits availed by the taxpayer. Say for instance, you are a teacher and you have just moved to a new place. If you deduct the moving expenses and cost of supplies required for your classroom teaching, these deductions will lower your AGI. However they can be shown as tax deductible expenses and can fetch you tax refunds.
On Form 1040 (Standard US Income Tax Return), The AGI section is the last number on the first page of the form. Precisely, AGI decides your income tax liability that includes tax bracket and qualification credits. The IRS also has an adjusted gross income calculator (AGI calculator) that will aid in the calculation.
Modified Adjusted Gross Income
Modified Adjusted gross income (MAGI), or modified gross income is not the same as AGI. MAGI is the amount of income which is calculated by adding certain deducted expenses (passive income like student loan deductions, student tuition fees, taxable social security, self employment tax, IRA contribution deductions, higher education costs, foreign income and foreign housing deductions) to the AGI. This income determines how much percentage of the individual's contribution towards IRA is deductible and whether the tax payer is eligible to avail tax benefits (like social security benefits, traditional IRA contributions and some tax deductions) or not. So higher this MAGI amount, the deductible amount of IRA's contribution reduces. Remember, this amount is not tax deductible. Also, many a time, this amount is either higher than or nearly same as the adjusted gross income. However there is a benchmark on MAGI, as all these benefits are quantified by limits. If MAGI is quite high, a person may not be eligible to avail the benefits.
So if you want to find out your adjusted gross income for the current financial year, take into account the AGI of the previous financial year. Once, you are done with calculation of AGI, the next concern is calculating MAGI. Make a checklist of all deductions that need to be added to your current AGI. And make sure that the deductions that are added to your MAGI do not exceed a certain limit as a high amount of MAGI cannot earn you tax refunds.
By Narayani Karthik
Published: 8/12/2010
Read more at Buzzle: http://www.buzzle.com/articles/what-is-adjusted-gross-income-agi.html
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