What is Adjusted Gross Income (AGI)?

Adjusted Gross Income (AGI) is an important figure in the tax process as it serves as an interim calculation in determining an individual's income tax liability. AGI is derived from total income, which includes wages, dividends, capital gains, and other sources of income, but it is adjusted by subtracting specific deductions such as retirement plan contributions, student loan interest, and certain education expenses. This adjustment makes AGI a more accurate representation of income for tax purposes, as it reflects a taxpayer's ability to pay taxes more than just total income would.

While total income before deductions is a component of AGI, the adjusted element distinguishes it from simply total income. AGI is not an estimate of post-tax income since it does not account for taxes already paid or owed. Furthermore, it is not a fixed sum determined by tax authorities but rather a calculation based on individual financial situations and applicable adjustments defined by tax laws. This specific function of AGI in tax preparation underscores its importance in the overall calculation of an individual’s tax liability.