How to Calculate Adjusted Gross Income
Adjusted gross income, often shortened to AGI, is used to determine an individual taxpayer's tax liability for income tax purposes. Adjusted gross income is very simple to calculate, provided you have your income information from the prior tax year, which is generally reported on your Form W-2 or Form 1099. If you run your own business or are self-employed, you will have to calculate your total gross income yourself before you can calculate your adjusted gross income.
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Instructions
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1
Determine your gross income. If you received a Form W-2 or Form 1099 from your employer, you can easily determine your gross income by reviewing your form. On a Form W-2, your gross income is reported on Line 1 under wages, tips, and other compensation. On a Form 1099-MISC, your gross income is reported on Line 7 under nonemployee compensation. You may also have additional income not reported on these forms, including interest earned from investments, stocks dividends, and trust payments, which must also be included when calculating your total gross income.
If you own your own business or are self-employed in another capacity where you do not receive a Form 1099 for your income, you will need to calculate your gross income yourself. To do this, you will need to calculate your total income from all sales of goods and subtract the total costs of purchasing the goods for sale. If you offer a service, then simply calculate your total income from providing those services. Do not subtract other any other business expenses when determining your total gross income.
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2
Determine what deductions you are eligible to claim. There are certain deductions you can claim "above the line," which reduces your gross income prior to determining your income tax liability. These include: alimony payments, contributions to your IRA; the one-half self-employment tax credit; contributions to self-employed HSA; and interest paid (not owed) on student loans, among others. You can find a link the complete list of allowable deductions in the resources at the bottom of this article.
Note: These deductions are not to be confused with itemized deductions, which are claimed after your adjusted gross income has been calculated.
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Calculate the total amount of deductions you are eligible to claim by adding up the maximum amounts you are allowed for each deduction you are taking.
Tip: You do not need to submit your receipts when claiming deductions on your income tax return. However, you may want to hang on to them just in case the IRS contacts you to verify your eligibility to take the deductions you claimed.
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Subtract the total amount of the deductions you are claiming from your total gross income calculated in Step 1. Your formula should resemble the one below:
Total Gross Income - Total Amount of All Deductions = Adjusted Gross Income
The final amount you determine after subtracting all eligible deductions is your total adjusted gross income. From here, you can determine your income tax liability.
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Tips & Warnings
If you are particularly bad at math, or you'd rather cheat, you can use an adjusted gross income calculator to calculate your adjusted gross income. Check the resources for a link to a free online adjusted gross income calculator you use for this purpose.
Remember to include only your allowable deductions when calculating your adjusted gross income.
