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Adjusted Gross Income (AGI) is a key term in the U.S. tax system. It represents an individual’s or a household’s total income from various sources minus specific adjustments or deductions allowed by the Internal Revenue Service (IRS). AGI serves as a starting point for determining taxable income and calculating federal income taxes.

To calculate AGI, individuals must first calculate their total income, which includes:

1. Wages and Salaries: Income earned from employment, including bonuses, tips, and commissions.

2. Self-Employment Income: Income earned from running a business or working as a freelancer.

3. Investment Income: Income from dividends, interest, capital gains, rental properties, and other investments.

4. Retirement Income: Income from pensions, annuities, Social Security benefits, or distributions from retirement accounts like 401(k) or Individual Retirement Accounts (IRAs).

5. Other Income: Any additional income from sources such as alimony, royalties, or rental income.

Once the total income is determined, certain deductions, also known as “above-the-line deductions,” are subtracted to arrive at the AGI. These deductions include:

1. Educator Expenses: Deductions for qualified expenses incurred by eligible educators for books, supplies, and professional development.

2. Student Loan Interest: Deductions for interest paid on qualified student loans.

3. Contributions to Retirement Accounts: Deductions for contributions made to qualified retirement accounts, such as Traditional IRAs or 401(k) plans.

4. Health Savings Account (HSA) Contributions: Deductions for contributions made to HSAs if eligible.

5. Self-Employment Expenses: Deductions for eligible business expenses incurred by self-employed individuals.

6. Deductible IRA Contributions: Deductions for contributions made to Traditional IRAs, subject to certain limits and eligibility requirements.

After subtracting these deductions from the total income, the result is the AGI. AGI is an important figure in tax calculations, as it determines eligibility for certain tax deductions, credits, and exemptions, and it serves as the basis for calculating taxable income.

It’s worth noting that state and local tax systems may have their own calculations and rules for determining adjusted gross income, which may differ from the federal tax system.

Understanding AGI is crucial for taxpayers to accurately determine their tax liability, claim eligible deductions and credits, and comply with tax laws. Consulting a tax professional or referring to IRS guidelines can provide further guidance on calculating AGI and fulfilling tax obligations.

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