What Is Adjusted Gross Income?

Summary

Ash from the 'Better Than Yesterday' blog explains the concept of Adjusted Gross Income (AGI), emphasizing its importance in tax calculations. AGI includes all income sources, not just salary, and requires adjustments, known as 'above the line deductions', to reduce the gross income before applying itemized or standard deductions. Being aware of these deductions can save on taxes, and even with a tax preparer, it's crucial for individuals to understand and provide information on these adjustments to ensure an accurate tax return.

Takeaways

• 📘 Adjusted Gross Income (AGI) is a term that refers to your total income minus certain adjustments.
• 🔍 AGI is calculated by tax preparers because it includes various deductions that are specific to the tax code.
• 💼 Gross income is the total money earned in a year, including all sources, not just a regular paycheck.
• 📋 The script lists potential income sources that should be considered when calculating gross income.
• 🔄 To find AGI, you subtract total adjustments from the total gross income, which is a process known as 'above the line deductions'.
• 📉 Adjustments reduce your income before applying itemized or standard deductions, which can lower your taxable income.
• 💡 Being aware of these adjustments can help save on taxes, as they can be overlooked if not mentioned by the taxpayer.
• 📚 It's beneficial for taxpayers to be educated about the adjustments that impact their tax return, even if they have a tax preparer.
• 🤔 A tax preparer relies on the information provided by the taxpayer to prepare the return, so missing information can lead to missed deductions.
• 📝 The script encourages following along for more tax tips to stay educated during the tax season.

Q & A

What is Adjusted Gross Income (AGI)?

Adjusted Gross Income, or AGI, is a measure of an individual's total income minus certain adjustments. It is used to calculate an individual's tax liability and is an important figure in tax preparation.

Why is it necessary to get AGI from a tax preparer instead of calculating it yourself?

A tax preparer is knowledgeable about various deductions that can be included in the AGI calculation, which might be overlooked by an individual. They can ensure that all possible deductions are accounted for, potentially reducing your tax liability.

What is considered as part of an individual's gross income?

Gross income includes all money earned throughout the tax year from various sources, not just a paycheck. This can include earnings from investments, rental properties, and other income streams.

What are 'above the line deductions' in the context of AGI?

Above the line deductions are adjustments made to an individual's gross income before applying itemized or standard deductions. These deductions are used to calculate the adjusted gross income.

How is the AGI calculated?

To calculate AGI, you subtract total adjustments from the total gross income. This formula is: AGI = Total Gross Income - Total Adjustments.

Why is it important to be aware of the adjustments that can be made to your income?

Being aware of these adjustments can help save on taxes. Even with a tax preparer, it's beneficial to understand the deductions that affect your tax return, as they can only prepare your return with the information you provide.

What could happen if you don't provide information about adjustments to your tax preparer?

If you do not provide information about possible adjustments, your tax preparer may miss out on these deductions, which could result in a higher tax liability than necessary.

What are some examples of potential income sources that should be included in gross income?

Examples of potential income sources include wages, salaries, interest, dividends, rental income, capital gains, and any other forms of earnings received during the tax year.

What are some examples of potential adjustments that can reduce an individual's income for AGI calculation?

Potential adjustments could include contributions to a traditional IRA, student loan interest, alimony payments, and certain educational expenses, among others.

How can staying educated on tax adjustments benefit an individual during tax season?

Staying educated on tax adjustments allows an individual to be more proactive in managing their tax situation, potentially identifying deductions and credits that could reduce their overall tax bill.

Why is it beneficial to follow along for more tax tips during the tax season?

Following along for more tax tips can help individuals stay informed about changes in tax laws, deductions, and strategies that could affect their tax return and potentially save them money.