gross income

Adjusted Gross Income

Adjusted gross income (AGI) is a United States tax term for an amount used in the calculation of an individual's income tax liability. AGI is calculated by taking an individuals gross income and subtracting the income tax code's enumerated deductions, and is an important benchmark determining certain other allowed benefits.

For example, most limitations on deductions or credits are determined based on either AGI or modified adjusted gross income (MAGI). MAGI is AGI modified by certain amounts specific to the given limitation.

Gross income includes wages, interest income, dividend income, income from certain retirement accounts, capital gains, alimony received, rental income, royalty income, farm income, unemployment compensation, and certain other kinds of income. AGI is the last number on the first page of the Form 1040, the standard U.S. income tax return form for individuals.

Deductions from gross income allowed in arriving at AGI (above the line deductions)

For the 2006 tax year, some examples of the deductions from gross income allowable in computing AGI include:

The above list is not comprehensive. The deductions allowable in arriving at adjusted gross income should not be confused with itemized deductions such as home mortgage interest expense, medical expenses, property taxes, charitable contributions, etc. For a complete list of deductions that help you compute your AGI, see §62 of the Internal Revenue Code.

These deductions are called "above the line" deductions because they are taken while computing a taxpayer's AGI. The AGI is "the line." Itemized deductions are "below the line," and are generally not favored by taxpayers because only the amount exceeding a fixed percentage of their AGI can be deducted. For instance, only business expenses over 2% of AGI and medical expenses over 7.5% of AGI would be eligible for deduction in 2007. See itemized deductions for more on this.

Modified adjusted gross income

In U.S. tax law, modified adjusted gross income (MAGI) is the adjusted gross income (AGI), modified by various adjustments. There are various MAGIs, computed in different ways; the most used is Modified AGI for Roth IRA purposes, detailed in the instructions to Form 8606. Other MAGIs appear in Form 8839 (Qualified Adoption Expenses) and Form 8815 (Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued after 1989).

Modified AGI for Roth IRA purposes

The Modified AGI for Roth IRA purposes is used to determine how much can be contributed to certain personal retirement programs. The starting point to determine MAGI is adjusted gross income (AGI), which is basically total income minus certain adjustments.

Once AGI is determined, then under certain circumstances, taxpayers must calculate their modified adjusted gross income (MAGI). Among other situations, this calculation is called for in determining whether Roth IRA income limits have been reached, and therefore whether a Roth contribution can be made. Certain adjustments allowed in arriving at AGI are then added back to arrive at modified adjusted gross income.

Upward adjustments that modify AGI are generally made by disallowing deductions for passive activity losses, to include all rental losses, not allowing adjustments taken for tuition, fees, student loan interest paid, IRAs, nor the deduction for paying one-half of self-employment tax. Deductible money placed in a 401(K) is allowed.

Additionally, MAGI is raised by including interest earned from U.S. Savings Bonds that were used for higher education expenses (which is usually excluded income for simple AGI purposes).

Finally, the taxpayer's MAGI is lowered by excluding Taxable Social Security income received.

Nationwide AGI

Average AGI per Tax Return for the USA:

199619971998199920002001200220032004200520062007
$37,689$40,579$43,407$46,079$49,202$47,373$46,385$47,592$51,342$55,238$55,019pN/A
+7.1%+6.52%+5.80%+6.35%-3.86%-2.13%+2.54%+7.30%+7.05%-0.40%N/A

Source: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00.html These are not adjusted for inflation. p=Preliminary. See http://www.irs.gov/newsroom/article/0,,id=168554,00.html.

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