Taxes
Adjusted Gross Income
Determining Your AGI
Like we said earlier, preparing your taxes is a step-by-step approach. When preparing
your federal tax return, the first number you
need to determine is your Adjusted Gross Income (AGI). This can be found from
using the following formula:
Gross Income - Gross Income Deductions = Adjusted Gross Income, or AGI
Gross Income
By gross income, we mean that you'll need to calculate all your earnings from
the previous year, from your jobs, investments, or other sources.
Here's a basic (and partial) listing of gross income sources includes:
- Salary, wages, tips, commissions, bonuses, profit or loss from a business, up to 85%
of social security income
- Alimony received (but, not child support)
Basically, your gross income represents the traditional way that most people will
earn income (i.e. in the form of compensation for their labor.) For many people,
this may be their only source of income. Once your gross income is determined, you’ll
want to look for any income deductions you can apply to that income. Some of the
more common gross income deductions are:
Gross Income Deductions
Now that you've figured out your gross income, it's time to calculare your gross
deduction, which can help lower your AGI, which will lead eventually to a lower
tax liability.
- Alimony paid (but, not child support paid)
- Student loan interest
- Penalties on early withdrawals of savings (like CDs)
- Part of Self-employment tax, and self-employment health insurance
- Health Savings Account or Archer MSA deduction
- Certain moving expenses that are job related
- Contributions to an Individual Retirement Arrangement (IRA)
In other words, the US Government gives preferential tax treatment to certain uses
of your income. For example, if you take out a student loan to further your education
and you pay interest on that student loan, you can deduct that from your gross income
before you determine your AGI. As you will see later, the more you can reduce your
AGI, the lower your tax liability. Yet, while student loan interest might be used
to reduce your income tax bill, interest on the loan on your car or credit cards,
does not reduce your taxes.