Your adjusted gross income is often referred to as your taxable income and is the number that is used for a baseline to determine whether you are eligible for various tax deductions. For example, you can only deduct medical expenses that total over 7.5 percent of your adjusted gross income (10 percent as of 2013). Items that are deductible as adjustments to your income do not require you to itemize deductions to take advantage of available tax savings.
You report all of your taxable income in the first section of your income tax return. This includes income from all salaries or wages that is reported to you on Form W-2. Taxable interest income, as well as income from dividends, is listed here as well. Business income or loss is added to your income. Any taxable income from any source is used in the calculation of adjusted gross income.
Tax Deductible Account Contributions
You can deduct as an adjustment to your income any contributions that you make to tax-advantaged accounts. Deductible traditional IRA contributions can be deducted from your income, as well as contributions that you make to health care savings accounts. SEP and SIMPLE IRA contributions are also deductible as an adjustment to your income.
Other deductions that you may take as adjustments to income include alimony payments you are ordered by a court to pay. You must enter the recipient's Social Security number. Student loan interest expenses and some tuition expenses are also deductible as an adjustment to your income. You can also deduct one-half of your self-employment Social Security taxes, as well as early withdrawal penalties on savings.
Finishing the Calculation
After you add up all of the sources of your income, subtract all of the applicable adjustments that you are allowed. The result is your adjusted gross income. This is also the amount that you show on line 38 of Form 1040, or line 21 of Form 1040A. If you file Form 1040A, you cannot claim certain adjustments, such as contributions to health care savings accounts or alimony that you pay.
Modified Adjusted Gross Income
Another term you need to know is modified adjusted gross income. This is the amount used to determine if you can contribute to an IRA account or claim a deduction for that contribution. To calculate modified adjusted gross income, add back to your adjusted gross income any IRA contributions, student loan interest, and employer-provided adoption benefits.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.