AGI: What it is – How it Works?



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The U.S. individual tax return is based around the concepts of Adjusted Gross Income (AGI) and Taxable Income (TI).  AGI is the amount that shows up at the bottom of page one of Form 1040, individual income tax return.  It is the sum of all of the taxpayer’s income less certain allowed adjustments (like alimony, one-half of self-employment taxes, a percentage of self-employed health insurance, retirement plan contributions and IRAs, moving expenses, early withdrawal penalties and interest on student loans).  This amount is important because it is used to calculate various limitations within the area of itemized deductions (e.g., medical deductions: 10 percent of AGI; miscellaneous itemized deductions: 2 percent of AGI). 

When a healthcare professional taxpayer hears the phrase “an above the line deduction”, the line being referenced is the AGI line on the tax return.  Generally, it is better for a deduction to be an above the line deduction, because that number helps a taxpayer in two ways.  First, it reduces AGI, and second, since it reduces AGI, it is also reducing the amounts of limitations placed on other deductions as noted above.

Obviously, if there is an above the line there is also a “below the line” deduction.  These below the line deductions are itemized deductions (or the standard deduction if itemizing is not used) plus any personal exemptions allowed. AGI less these deductions provides the taxable income on which income tax is actually calculated. All of that being said, it is better for a deduction to be an above the line deduction. Although this is a bit dry, it helps to understand the concepts in order to know where items provide the most benefit to the medical professional taxpayer.

                            PERSONAL TAXATION CALCULATIONS

Gross Income (all income, from whatever source derived, including illegal activities, cash, indirect for the benefit of, debt forgiveness, barter, dividends, interest, rents, royalties, annuities, trusts, and alimony payments-no more)

    Less non-taxable exclusions (municipal bonds, scholarships, inheritance, insurance

                                            proceeds, social security and unemployment income [full or

                                            partial exclusion], etc.).

Total Income

    Less Deductions for AGI (alimony, IRA contributions, capital gains, 1/2 SE tax,

                                               moving, personal, business and investment expenses, and

                                               penalties, etc.). 

Adjusted Gross Income (bottom Form 1040)

    Less Itemized Deductions from AGI, (medical, charitable giving, casualty,

involuntary conversions, theft, job and miscellaneous expenses, etc.), or

    Less Standard Deduction (based on filing status)

    Less Personal Exemptions (per dependents, subject to phase outs)

Taxable Income

   Calculate Regular Tax

      Plus Additional Taxes (AMT, etc.)

      Minus Credits (child care, foreign tax credit, earned income housing, etc.)

      Plus Other Taxes

Total Tax Due



Thank You



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