Adjusted Gross Income: Definition, Calculation, and Examples
Your Adjusted Gross Income (AGI) is one of the most important figures on your income tax return. AGI directly impacts your self-employment tax strategy and your overall tax burden, including your tax bracket, credit eligibility, and deduction limits. Lowering your AGI for the year is imperative.
If you find that your business income fluctuates from year to year or you have diverse income streams, calculating your AGI correctly can mean the difference between maximizing deductions that reduce your tax liability and leaving more of your hard-earned money on the table. If you're not sure where to start, this guide will help. Use it to understand what AGI is, what's included, and how to lower it, along with other examples and considerations to strengthen your tax position. Expert AGI support is also available when you're ready.
1-800Accountant's CPAs, EAs, and tax professionals can help you identify every eligible adjustment so your AGI works for you, not against you.
Key Takeaways
What AGI is: Your gross income minus specific above-the-line deductions.
Why AGI matters: It will determine your tax bracket and eligibility for credits.
Where to find AGI: Line 11 of IRS Form 1040, U. S. Individual Income Tax Return.
What affects AGI: Retirement contributions, student loan interest, and Health Savings Account (HSA) contributions impact AGI.
Small business owners: Self-employment deductions directly reduce your AGI.
What is Adjusted Gross Income?
AGI is the primary number used to determine how much money you owe in federal income taxes and your eligibility for tax credits or deductions.
Use this formula to calculate AGI:
Gross Income – Above-the-Line Deductions = Adjusted Gross Income
Gross income is your total earnings before any deductions, while AGI, as demonstrated by the formula, is your gross income minus above-the-line tax deductions. Your taxable income is determined after subtracting standard or itemized deductions from your AGI, which is the final amount that will be subject to tax. Your AGI must be calculated before standard or itemized deductions, typically referred to as below-the-line adjustments.
How to calculate Adjusted Gross Income
Follow these steps to learn how to calculate AGI.
Step 1: Calculate Your Gross Income
IRS Form 1040 is where you'll start calculating your AGI. In the section marked “income,” you’ll begin by adding up your gross or total income. This is your total income subject to income tax. Lines 7-22 will help you count everything that’s included in your income, such as:
IRS Form W-2, Wage and Tax Statement wages
Self-employment income via Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
IRS Form 1099 income
Capital gains
Rental income
Business income
IRS Form 1099-K, Payment Card and Third Party Network Transaction reporting thresholds changed beginning in 2025, which may affect documentation but not your taxable income.
Step 2: Subtract Above-the-Line Deductions
You'll also need to subtract your eligible adjustments from your total gross income. Tax deductions work as tax write-offs, and you'll encounter these throughout the tax year. This increases the importance of efficient and accurate bookkeeping. If your books are messy, you could miss deductions.
Common adjustments to reduce your AGI include:
Traditional IRA contributions
Self-employed retirement plan contributions
Self-employed health insurance
HSA contributions
Student loan interest
Educator expenses
Half of the 15.3% self-employment tax
Alimony (pre-2019 agreements)
Military moving expenses
The State and Local Tax (SALT) deduction cap increased to $40,000 for qualifying taxpayers starting in 2025 due to the passage of the One Big Beautiful Bill Act (OBBBA). Because SALT is considered to be below-the-line, it does not directly reduce your AGI.
What is Included in AGI?
Your AGI includes all forms of income subject to income tax, including:
Earned Income
Job wages or earnings
Self-employment income
Investment Income
Dividends
Capital gains
Interest income
Retirement & Benefits
Social security benefits
IRA distributions
Pension income
While Social Security benefits are taxable, the exact portion depends on your AGI.
How to Lower Your Adjusted Gross Income
For Self-Employed Business Owners
Payments made throughout the year can be deducted from your taxable business income. Since these payments aren't counted as income, they can help to reduce your AGI. Some above-the-line tax deductions that can lower your AGI include:
Retirement plan contributions to a SEP-IRA and Solo 401(k)
HSA contributions
Health insurance costs for self-employed individuals
Other employment taxes paid by self-employed individuals
Student loan interest payments
Qualified educator expenses
Moving expenses for the armed forces
Alimony payments for divorces in effect before 2018
Proper expense tracking throughout the year is critical, as is embracing newer depreciation strategies, such as 100% bonus depreciation, restored by the OBBB. Accurate bookkeeping ensures every eligible deduction is captured prior to your AGI calculation.
AGI vs. MAGI
Your AGI will affect your ability to claim other tax credits and below-the-line deductions. It also determines your basic level of tax bracket.
Modified Adjusted Gross Income (MAGI) is a similar but subtly distinct number that is also important. It's your AGI with some tax-exempt deductions added back in, and is particularly important for:
Roth IRA eligibility
Premium Tax Credit on public healthcare exchanges
IRA deduction phaseouts
To perform this calculation, you take your AGI and add back in certain deductions that are not considered for the MAGI, including:
IRA contributions
Social Security payments
Student loan interest payments
Any foreign income you left out
Half of your self-employment taxes
Other deductions that aren’t often claimed
AGI Examples
These two simple examples will help self-employed individuals and W-2 employees determine their AGI for the year.
Example 1: Self-Employed Consultant
Imagine that you had the following income and expenses in 2025 as a self-employed consultant (filing Schedule C):
$80,000 gross business income
$10,000 business expenses
$5,000 retirement contribution
$3,000 HSA contribution
Here's how you would calculate AGI:
Determine net business income. $80,000 gross business income minus $10,00 business expenses = $70,000.
Make adjustments to net income. $70,000 minus $5,000 retirement contribution and $3,000 HSA contribution = $62,000.
In this simple example, your AGI would be $62,000.
Example 2: W-2 Employee
Imagine that you have the following income and expenses in 2025 as a traditional employee:
$60,000 total income from your job
$2,000 in IRA distributions
$2,500 paying off student loan interest
$3,000 as an IRA contribution
Here's how you would calculate AGI:
Determine total income for the year. $60,000 in job wages plus $2,000 in IRA distributions = $62,000.
Make adjustments to income. $62,000 minus $2,500 student loan interest and $3,000 in IRA contributions = $56,500.
In this simple example for a traditional W-2 employee, your AGI would be $56,500.
Why AGI Matters for Tax Credits and Deductions
AGI functions as the primary threshold for limiting or phasing out tax benefits, including:
Child Tax Credit phaseouts. This credit is reduced by $50 for every $1,000 that MAGI exceeds $400,000 for married filing jointly or or $200,000 for other filers.
Earned Income Tax Credit. Eligibility is restricted by AGI and earned income levels.
Premium Tax Credit. Higher AGI increases the share of premiums you'll pay, reducing the credit amount. If MAGI exceeds 400% of the federal poverty line, the subsidy may be reduced or eliminated.
Education Credits. The American Opportunity Tax Credit and Lifetime Learning Credit are gradually reduced to zero if MAGI exceeds $80,000 to $90,000 for single filers or $160,000 t0 $180,000 for those filing jointly.
Medical expense deduction threshold: You can only deduct unreimbursed medical expenses that exceed 7.5% of your AGI. A higher AGI means clearing a higher hurdle before claiming a deduction.
FAQs About Adjusted Gross Income
Where do I find my AGI on Form 1040?
You'll find your AGI on Line 11 of IRS Form 1040. It is also located on Line 11 of IRS Form 1040-SR. If you're 65 or older, you may be eligible to use IRS Form 1040-SR.
Is AGI the same as taxable income?
When it comes to AGI vs. taxable income, they aren't the same. AGI is your total gross income minus above-the-line deductions, while your taxable income is your AGI minus standard or itemized deductions. This is the amount you will use to calculate your tax liability for the year.
How does AGI affect my tax bracket?
AGI is the starting point for calculating your taxable income for the year. This will determine your federal income tax bracket and overall liability. Taking steps to lower your AGI can help keep you in a lower tax bracket.
Can I lower my AGI after the tax year ends?
Yes, you can lower your AGI after the tax year ends. If you're a calendar-year filer, you'll have a window between December 31st and April 15th to lower your AGI. One of the most popular ways to lower AGI is by contributing to an IRA.
Does AGI affect state taxes?
Yes, AGI affects your state taxes. A majority of states use federal AGI as a starting point for determining your state tax liability. After that, many allow adjustments that may help you keep a larger part of your income.
How does AGI impact small business owners?
AGI is critically important for small business owners and other self-employed individuals. It helps determine your taxable income, tax bracket, and eligibility for deductions and credits. The higher your AGI, the fewer benefits you can claim.
What is a good AGI for tax planning purposes?
A good AGI for tax planning purposes in 2026 is below $500,000 if filing jointly or $250,000 if filing separately. Take advantage of recent changes, such as the increase in the SALT deduction from $10,000 to $40,000. SALT begins to phase out for higher-income earners.
Work With Tax Experts Who Help You Optimize AGI
AGI is an incredibly impactful number, and managing it effectively can unlock significant savings. While self-employed professionals can refer to this guide to handle AGI themselves, professional, full-service support is optimal for achieving the best results. When you trust 1-800Accountant, America's leading virtual accounting firm, with your AGI-related financial work, you'll receive:
Proactive tax planning support
Regular quarterly reviews
Year-round tax advisory
Schedule a free 30-minute consultation to see how strategic tax planning can help reduce your AGI and increase your savings in 2026.