What is Adjusted Gross Income (AGI)?
AGI, or Adjusted Gross Income, is a crucial financial term that summarizes an individual’s total income for tax purposes. It represents the total money a person earns from various sources minus specific deductions and adjustments.
Understanding AGI is important for several reasons:
- It determines eligibility for various tax benefits and credits, such as the Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Credit for education expenses.
- It is used as a basis for calculating taxable income, which ultimately determines the amount of income subject to federal and state income taxes.
- It serves as a measure of an individual’s financial standing and is often required for various financial applications, such as assessing creditworthiness, determining loan eligibility, or establishing rental agreements.
Example Calculation 1
Let's assume the following values:
- Total Gross Income (\(GI\)) = $80,000
- Total Deductions (\(D\)) = $10,000
Using the formula:
\[
AGI = 80000 - 10000 = 70000 \text{ dollars}
\]
The Adjusted Gross Income is $70,000.
Example Calculation 2
Let's assume the following values:
- Total Gross Income (\(GI\)) = $120,000
- Total Deductions (\(D\)) = $20,000
Using the formula:
\[
AGI = 120000 - 20000 = 100000 \text{ dollars}
\]
The Adjusted Gross Income is $100,000.
