Adjusted Gross Income

Last updated on 2023-09-26 13:58:58

Adjusted Gross Income (AGI) is the financial metric used by tax authorities to establish an individual's or a business's income tax liability. To calculate AGI, certain adjustable items such as business expenses and student loan interest are subtracted from the gross income. After AGI is determined, deductions are subtracted from it to find the taxable income. Additionally, the IRS utilizes other income metrics like Modified Adjusted Gross Income (MAGI) for specific tax programs and retirement accounts.

Definition: Adjusted Gross Income (AGI) is a financial metric used by tax authorities to determine an individual or business's tax liability. To calculate AGI, certain allowable adjustments, such as business expenses and student loan interest, are subtracted from gross income. After determining AGI, allowable deductions are further subtracted to determine taxable income.

Origin: The concept of AGI originated in U.S. tax law to provide a more accurate measure of income for fair tax calculation. As tax laws evolved, the methods for calculating AGI and its applicable scope have been refined.

Categories and Characteristics: AGI is mainly divided into personal AGI and business AGI.

• Personal AGI: Includes wages, bonuses, investment income, etc., minus allowable adjustments such as student loan interest and education expenses.
• Business AGI: Includes business revenue, minus business expenses, depreciation, etc.

The characteristic of AGI is that it is an intermediate calculation value that considers both the diversity of income and the legitimate deductions.

Specific Cases:

• Case 1: Suppose a person has an annual income of $100,000. After deducting $2,000 in student loan interest and $3,000 in education expenses, the AGI is $95,000. Further subtracting the standard deduction results in taxable income.
• Case 2: A business has an annual revenue of $500,000. After deducting $100,000 in business expenses and $50,000 in depreciation, the AGI is $350,000. Further subtracting other allowable deductions results in taxable income.

Common Questions:

• Question 1: What items can be deducted from gross income to calculate AGI?
  Answer: Common deductible items include student loan interest, education expenses, business expenses, and retirement account contributions.
• Question 2: What is the difference between AGI and MAGI?
  Answer: Modified Adjusted Gross Income (MAGI) is AGI plus certain deductions added back, used for specific tax plans and retirement account eligibility assessments.

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