Adjusted Gross Income
What does "Adjusted Gross Income" mean in law?
Adjusted Gross Income (AGI) is an intermediate tax computation defined under IRC Section 62, calculated by subtracting certain 'above-the-line' deductions from gross income. These above-the-line deductions include trade or business expenses, certain losses from property sales, contributions to qualified retirement accounts, student loan interest, and alimony payments (for pre-2019 agreements). AGI serves as a critical threshold figure because numerous tax benefits, including medical expense deductions, charitable contribution limits, and eligibility for credits, are phased in or out based on AGI levels. Understanding the distinction between above-the-line and below-the-line deductions is essential because above-the-line deductions reduce AGI and thereby expand access to other tax benefits.
Definition
Adjusted Gross Income (AGI) is an intermediate tax computation defined under IRC Section 62, calculated by subtracting certain 'above-the-line' deductions from gross income. These above-the-line deductions include trade or business expenses, certain losses from property sales, contributions to qualified retirement accounts, student loan interest, and alimony payments (for pre-2019 agreements). AGI serves as a critical threshold figure because numerous tax benefits, including medical expense deductions, charitable contribution limits, and eligibility for credits, are phased in or out based on AGI levels. Understanding the distinction between above-the-line and below-the-line deductions is essential because above-the-line deductions reduce AGI and thereby expand access to other tax benefits.
Example
A taxpayer with $120,000 in gross income who contributes $6,000 to a traditional IRA and pays $2,500 in student loan interest has an AGI of $111,500, which then determines whether she qualifies for various income-sensitive credits and deductions.