What Is Adjusted Gross Income?

Better Than Yesterday, LLC

14 Feb 202202:08

Summary

TLDRAsh 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.

Outlines

00:00

📊 Understanding Adjusted Gross Income (AGI)

Ash introduces the concept of Adjusted Gross Income (AGI), explaining its significance in tax calculations. The paragraph clarifies that AGI is not just the sum of one's income but includes various deductions that can reduce the total income before tax is calculated. The speaker emphasizes the importance of knowing one's gross income from all sources, not just the paycheck, and the necessity of making adjustments to this income to arrive at the AGI. The paragraph also mentions 'above the line deductions' which are applied before itemized or standard deductions, and stresses the importance of being aware of these adjustments to potentially save on taxes. The speaker encourages the audience to stay informed about tax adjustments that can affect their tax returns, even if they have a tax preparer.

Mindmap

Keywords

💡Adjusted Gross Income (AGI)

Adjusted Gross Income, or AGI, is a key metric in the calculation of an individual's tax liability. It represents the total income earned during a tax year, minus certain deductions that are allowed by the tax code. In the video, AGI is the central concept, as it is the starting point for determining how much tax an individual owes. The script explains that AGI is derived from gross income after making specific adjustments, which can include contributions to retirement accounts or student loan interest payments.

💡Tax Preparer

A tax preparer is a professional who assists individuals in preparing and filing their tax returns. In the context of the video, the tax preparer is responsible for calculating the AGI by taking into account all relevant deductions and adjustments. The script emphasizes the importance of providing accurate information to the tax preparer to ensure that all possible deductions are considered, which can potentially lower the tax liability.

💡Gross Income

Gross income refers to the total earnings of an individual before any deductions or taxes are applied. It includes all forms of income, such as wages, salaries, tips, and other sources of earnings. In the video, gross income is the initial figure from which AGI is calculated by subtracting allowable adjustments, highlighting its foundational role in the tax calculation process.

💡Tax Deductions

Tax deductions are expenses that can be subtracted from an individual's gross income to reduce their taxable income. The script mentions that there are several tax deductions that can be included in the AGI calculation, such as contributions to retirement accounts. These deductions are crucial as they can significantly lower an individual's tax burden.

💡Above the Line Deductions

Above the line deductions are tax deductions that are taken before the standard or itemized deductions. They are considered 'above the line' because they are subtracted directly from the gross income. The video script uses this term to describe deductions that are made to reduce the AGI, such as student loan interest and contributions to retirement accounts, which are applied before considering the standard or itemized deductions.

💡Itemized Deductions

Itemized deductions are specific expenses that taxpayers can list on their tax return to reduce their taxable income, if the total of these deductions is greater than the standard deduction. The video script mentions itemized deductions in the context of reaching the AGI, indicating that they are an alternative to the standard deduction and can be considered after the above the line deductions have been applied.

💡Standard Deduction

The standard deduction is a fixed amount that can be subtracted from an individual's gross income to determine their taxable income, without having to itemize specific expenses. In the video, the standard deduction is presented as an option that taxpayers can take after considering above the line deductions to further reduce their AGI.

💡Income Sources

Income sources are the various ways in which an individual earns money. The video script provides a list of potential income sources to include in the calculation of gross income, such as wages, investments, and rental income. Understanding all income sources is essential for accurately determining an individual's gross income and, subsequently, their AGI.

💡Tax Return

A tax return is the document that taxpayers file with the tax authorities to report their income, calculate their tax liability, and determine any refund or amount owed. The video script emphasizes the importance of being educated on the adjustments that impact a tax return, as this knowledge can help taxpayers ensure that their tax preparer has all the necessary information to accurately prepare the return.

💡Tax Tips

Tax tips are pieces of advice or guidance provided to help individuals understand and navigate the tax system more effectively. The video script encourages viewers to follow along for more tax tips, suggesting that ongoing education is beneficial for staying informed during the tax season and potentially saving on taxes.

💡Tax Season

Tax season is the period during which individuals are required to file their annual tax returns. The video script uses the term to encourage viewers to stay educated about tax matters, particularly during the time when they are most likely to be dealing with tax-related tasks.

Highlights

Ash introduces the concept of Adjusted Gross Income (AGI) and its importance in tax preparation.

AGI is derived from gross income with certain deductions, not just a simple sum of tax forms.

Gross income includes all money earned during the tax year, including non-paycheck sources.

A list of potential income sources is provided to help understand what constitutes gross income.

Adjustments are necessary to reduce gross income to calculate AGI.

Adjustments are categorized as 'above the line deductions' because they are applied before itemized or standard deductions.

The formula for AGI is presented: total gross income minus total adjustments.

Being aware of adjustments can lead to tax savings, even with the help of a tax preparer.

The role of a tax preparer is to prepare returns based on the information provided by the taxpayer.

It's crucial for taxpayers to provide information about adjustments to avoid missing potential tax savings.

The blog encourages continuous education on tax adjustments to stay informed during the tax season.

The value of understanding AGI adjustments is emphasized for both individual and professional tax preparation.

The blog serves as a guide for taxpayers to navigate the complexities of tax deductions and AGI calculations.

Ash provides practical advice on how to ensure all eligible deductions are considered in tax returns.

The importance of accurate reporting of income and deductions for accurate AGI calculation is stressed.

The blog aims to empower taxpayers with knowledge to make informed decisions about their taxes.