If you're like many people, you dread doing your taxes each year – and with good cause. The process is complicated and riddled with phrases and rules. One of those phrases is "adjusted gross income" or AGI, and a lot of other tax rules depend on exactly what yours is. You must file Form 1040 or 1040A to calculate it. If you file form 1040EZ, your AGI is the same as your overall income, and this could end up costing you tax dollars.
Your AGI begins with your income – all your income. It's reportable on Lines 7 through 21 of your 1040, and it includes both earned and unearned income, business income if you're self-employed, alimony if you receive any, Social Security benefits and unemployment compensation. Line 21 is a catch-all category for almost everything else. With few exceptions, if money comes into your household, the Internal Revenue Service says it's reportable as income. If you receive child support, however, you don't have to claim this.
Adjustments to Income
After you add up all your income, you can begin deducting from it to arrive at your AGI. These deductions are "above the line" and appear on Lines 23 through 35 of your 1040. These are the only deductions that affect your AGI. Above-the-line deductions include alimony you may pay. The IRS doesn't tax you on this income. Above-the-line deductions also include a break for self-employment taxes if you work for yourself, certain retirement account contributions, and – if you have a dependent in college – tuition and fees you've paid on his behalf. When you subtract all these things that apply to you, the result is your AGI. It appears on Line 37 of the first page of your 1040 return.
Standard or Itemized Deductions
Typically, your AGI is not your taxable income, at least if you don't file Form1040 EZ. You can claim other deductions, but these don't affect your AGI. On the second page of your return, on Line 40, you can claim either the standard deduction for your filing status or the total of other deductions if you've elected to itemize instead. If you itemize, this is one of those areas where your AGI can affect your taxes. For example, medical expense deductions must exceed 7.5 percent of your AGI in 2012, and you can only claim the amount in excess of 7.5 percent. If your AGI is $90,000, they'd have to add up to more than $6,750 before you could deduct anything. If your AGI is only $50,000, you'd need only $3,750 in expenses before being able to deduct something.
Exemptions also come off your income after you arrive at your AGI. These are the dollar amounts the IRS allows you for you, your spouse, and for each of your dependents: $3,800 each as of 2012. If you're married with two dependent children, you can shave $15,200 off your taxable income.
Your taxable income appears on Line 43 of your 1040. This is the number you would apply to the current tax brackets to find out exactly what you must pay in taxes. The good news is that you may not be done making deductions yet. If you're eligible for any tax credits, these are different from deductions. Deductions calculate your taxable income, while credits subtract from what you owe the IRS. You can begin subtracting any credits you qualify for on Line 47 of your 1040, as well as taxes you've already paid through withholding or estimated payments during the year. The end result determines whether you'll get a refund or if you owe the government.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.