I often come across the term AGI while going through Child tax credit or adoption tax credit etc. What it actually mean and how should I compute AGI ?
The AGI or adjusted gross income is the gross income you earned during the full tax year , minus certain adjustments allowed as per 26 US Code. So, what is the quickest way to know what are the allowable reductions that you can reduce from gross income ?Just visit the the front page of your Form 1040 and you will find adjustments list that include the following:
- Tax-exempt interest
- Qualified dividends
- IRA distributions .
- Pensions and annuities .
- Social security benefits
Other adjustments used in calculating Adjusted Gross Income or AGI include the following:
- Health savings account deductions
- Penalties on the early withdrawal of savings
- Educator expenses
- Student loan interest
- Tuition and fees
- Certain business expenses of performing artists, reservists, and fee-basis government officials
How does the Adjusted Gross income (AGI) effect your taxes?
The amount of your Adjusted Gross Income or AGI affects your eligibility for many tax credits, such as,
- The child and dependent care credit
- Credits for the elderly or permanently disabled
- The adoption tax credit
- The Child Tax Credit
- The American Opportunity & Lifetime Learning tax credits
- The Earned Income Tax Credit
Phasing out Deductions Based on Adjusted Gross income (AGI)
Many tax deductions under Internal Revenue Code depends on the amount of of AGI . The more of AGI less of deductions you may be able to claim as these tax deductions are primarily intended to benefit lower income people. So, the tax deductions phase out or diminish altogether for an AGI above certain limits. Here is a list of most common tax deductions that phases out on the basis of your Adjusted Gross Income or AGI :
- Total itemized deductions
- Mortgage insurance premiums
- Medical deduction allowance
- Charitable contributions
