When somebody asks you what your income is, you probably tell them how much your salary is and that’s it. You’re not wrong, but when it’s time to do your taxes, you’re suddenly supposed to know your gross income vs. your adjusted gross income vs your taxable income. But wait, there’s modified adjusted gross income too? It makes you want to run to the nearest tax preparer and scream, “Help! What is my adjusted gross income?”
Gross Income
Gross income is exactly what it sounds like—the total of your income from all sources. That would be your salary, but also any capital gains, dividends, royalties, pensions, interest, business income, alimony, rents, and other income. But not all of this income is taxable and adjustments to it can be made, giving you your adjusted gross income.
Adjusted Gross Income (AGI)
You can adjust your gross income by subtracting the following items from it: educator expenses, self-employed health insurance deductions, one-half self-employment tax, self-employed SEP, SIMPLE and IRA deductions, student loan interest deductions, alimony, and health savings account deductions. Now, you should have your adjusted gross income.
Modified Gross Income (MAGI)
But why do I keep seeing the term “modified adjusted gross income?” MAGI, as it’s known, is your AGI with some adjustments, such as student loan interest and IRA contributions, added back in. This amount does not actually appear on your taxes but is used on some tax worksheets to determine your eligibility for certain tax credits and deductions. For some people, their AGI and MAGI may be the same, if not very close.
Taxable Income
Once you know your adjusted gross income, you can either take itemized deductions or the standardized deduction from that amount. Now you have your taxable income, and you can figure out the amount of taxes that you owe.
Tax Credits
But you may not be done yet! Once your tax liability is calculated, you may still be eligible for some tax credits that could lower that tax liability.
If you’re still wondering what your adjusted gross income is, give one of our tax preparers a call. We’re happy to help.
**Please keep in mind: Tax laws and eligibility requirements change often, and these lists are not exhaustive. Always contact a tax preparer for the most up-to-date information.