How to Calculate Adjusted Gross Income (AGI) for Tax Purposes

How to Calculate Adjusted Gross Income (AGI) for Tax Purposes

Calculate your Adjusted Gross Income (AGI) to determine your taxable income this year. Once you’ve determined what your adjusted gross income is, you can determine your tax liability for the year.

Here are some helpful tips on how to calculate your Adjusted Gross Income (AGI) for tax purposes.

Before calculating your AGI, you can determine if you need to file a tax return for the current year. The Internal Revenue Service (IRS) offers an interactive tax assistant that can be used to help you determine if you need to file your tax return for the current year. 

KEY TAKEAWAYS

  • The first step in calculating AGI is to determine your gross income for the year, which includes your wages, any income from self-employment, and any other income reported on Form 1099, such as investment dividends and retirement income.
  • To reach your final AGI, you can subtract a certain amount from your gross income. For example, teachers can deduct unreimbursed classroom expenses, self-employed can deduct insurance premiums, and everyone can deduct charitable donations.

Even though you are not required to file a tax return, the IRS recommends that you still file a tax return. This is because if you paid the tax, you may be eligible for a return income tax, or you may be eligible for certain credits.

How to Calculate AGI for Tax Purposes

Collect your income statement

The first step in calculating AGI is to determine your income for the year. Income can be in the form of money, property, or services you received during the tax year.

Income includes your traditional wages and salaries (reported on Form W-2), any income from self-employment, and any other income reported on Form 1099, such as investment dividends and retirement income. 3Reported brokerage and barter gains on Forms 1099-B, real estate transaction gains reported on Form 1099-S, and Form 1099-INT, and any investment dividends reported on Form 1099-DIV are considered your taxable income part of the amount.

Additionally, you need to include these taxable sources of income:

  • Operating income
  • farm income
  • union strike benefit
  • Taxable refunds, credits, or offsets for state and local income tax
  • Long-term disability benefits received before the minimum retirement age
  • jury service fee
  • Security deposit and rental property income
  • Prizes, prizes, gambling, lotteries, and contest winnings
  • Labor Discrimination Lawsuits Backward Wages
  • spousal support
  • Unemployment benefits
  • capital gains
  • Severance pay
  • Income from rental real estate, royalties, partnerships, private companies, trusts and license payments.

You can add up all these amounts to calculate your total income.

Tax-exempt income

Some income is not taxed. The following income sources do not count towards your AGI:

  • workers compensation benefits
  • child support allowance
  • Life insurance proceeds (unless the policy is given to you at a certain price)
  • Disability benefit
  • Capital gains from the sale of a first-hand home
  • Money received as a gift or other inherited asset
  • Cancellation of debt given to you as a gift
  • scholarship or fellowship
  • foster care
  • Funds transferred from one retirement account to another (as long as it is performed through a transfer between trustees)

Withdraw deductions and fees

To reach your final AGI, you can subtract a certain amount from your gross income.

Personal tax deduction

As a self-employed person, you pay Social Security and Medicare taxes in full. So if you apply for a self-employment tax deduction.

Classroom Fees for Teachers and Educators

If you are a kindergarten through 12th-grade teacher, instructor, counselor, principal, or aide who works at least 900 hours per year at a school that provides elementary or secondary education, you can deduct up to $250 in unpaid work-related expenses for the tax year.

According to IRS guidance, for the 2020 tax year, educators can deduct unpaid expenses they incur for COVID-19 protective programs starting March 12, 2020. 9

Self-employed medical insurance deduction

If you are self-employed, you can deduct the entire cost of the Self-Employed Medicare Deduction from your premiums. This also applies to your spouse and your dependents.

Qualified Performing Artists and Other Occupations

You can adjust your income if you are a qualified artist, as well as reservists and some paid government officials.

In addition to these deductions, there are deductions for charitable contributions and charitable fund contributions to a health savings account (HSA).

If you’re in the military, the cost of moving has a variety of self-employment-related costs, early exit penalty amounts, and student loan interest. 7

(In addition to health insurance premiums and half the self-employment tax, retirement plan contributions for self-employed workers are also deductible.)

Be careful when calculating amounts for these categories, as each category must meet special requirements.

Improved AGI and AGI

A common mistake made by inexperienced tax preparers is to use AGI when: Modified AGI should be used. While your AGI is used to determine the amount of income tax you owe and certain credits you are eligible for, your modified AGI is used to determine eligibility for other items, such as deductions for traditional fund contributions to the IRA and Eligible for Roth IRAs. 10 

Collaborate with professionals

Unless you have the time and ability to follow IRS instructions and perform any necessary research, it may be more practical to use the services of an experienced tax professional. While hiring a tax professional may cost you more, it may be worth it considering the time saved and the frustration of trying to figure out the rules yourself.

Bottom line

At first, glance, figuring out your AGI may seem like an easy process. However, even if you use IRS instructions to complete your tax return, you risk making costly mistakes, especially if you’re inexperienced. Even if you go through the process yourself, consider having a tax professional review the results to ensure they are accurate.

By aamritri

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