Individual income taxes are the primary source of revenue that funds the operation of the federal government. Fortunately, not all of your income is subject to taxation. The Internal Revenue Service, the federal organization charged with collecting income taxes, has a simple rule for determining how much of your income is taxable and how much is not. In a nutshell, all income that is not exempt from taxation by law is taxable income.
The IRS uses your gross income to determine whether you're required to file a federal income tax return for the year. Your gross income is all of the income you received during the tax year from any source, excluding tax-exempt income. The income doesn't have to be in cash -- it could be in the form of goods or services, including income from barter. Gross income includes both earned and unearned income, as well as income from both domestic and foreign sources.
Adjusted Gross Income
Your adjusted gross income, or AGI, is the amount left over after you subtract your adjustments to income from your gross income. Adjustments to income are determined by tax law and change periodically. For the 2012 tax year, items that qualify for adjustment include educator expenses, moving expenses, deductible contributions to a traditional individual retirement account, student loan interest payments and other expenses.
The amount of your income that is subject to federal income taxes is your taxable income. You can determine your taxable income by subtracting either your itemized deductions or standard deduction, and your exemptions, from your adjusted gross income. The amount of your standard deduction varies based on your filing status.
Modified Adjusted Gross Income
Your modified adjusted gross income, or MAGI, is not directly used to determine your taxable income, but it's an important figure in determining your eligibility for certain government programs. For example, your MAGI is used to determine Medicare income eligibility or your ability to contribute to a Roth IRA. The formula for determining your MAGI varies based on what it's being used for, but in general, your MAGI is your adjusted gross income with certain tax-exempt and foreign income added to it.
- Internal Revenue Service: Publication 501, Who Must File
- Internal Revenue Service: Definition of Adjusted Gross Income
- Internal Revenue Service: Form 1040
- Fairmark: Modified Adjusted Gross Income
- Internal Revenue Service: Publication 590, Modified AGI
- State Health Access Data Assistance Center: Modified Adjusted Gross Income: Implications for Medicaid Eligibility Systems under the ACA
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