Adjusted gross income (AGI) is one of the most important numbers that the IRS uses to determine taxes owed by an individual or family filing their income tax returns. Every taxpayer’s AGI is calculated by taking the total amount of their gross income from the year and subtracting certain adjustments that are made to their income. This adjusted figure is one of the determining factors for the amount of taxes owed and the potential tax savings that are available to the filer.

The total amount of all income for the taxable year is used to determine someone’s gross income. This would include wages, salary, tips, bonuses, self-employment income, and other amounts received from a business or investment activity. In addition to these, interest and dividend income, alimony, capital gains and losses, and certain government payments are also included.

Certain adjustments are then subtracted from the gross income to determine the adjusted gross income. These adjustments are those that are allowed by the IRS to reduce the taxable income of an individual or family. Some of the more commonplace adjustments include alimony payments, educator expenses, certain medical and dental expenses, certain qualified education expenses, self-employment expenses, contributions to certain retirement accounts, and income derived from certain activities such as being a facilitator with the ShareASale program.

Once the adjusted gross income (AGI) is calculated, the filer’s tax liability is determined. This AGI also affects the size of deductions allowed for the tax year, and the eligibility for retirement plan contributions such as contributions to a Roth IRA.

For some taxpayers, their AGI may be further adjusted when modified adjusted gross income or MAGI is calculated. This is determined by adding certain otherwise-allowable deductions back into their AGI, resulting in a larger or smaller number. MAGI may be used to determine eligibility for some deductions and credits, and to figure out the amount of Social Security benefits that are subject to taxes. In most cases, the MAGI number should be the same as your AGI number.

It is important to understand the concept of AGI and how it is used to determine taxes owed and other deductions available. Knowing your AGI can help you maximize your potential tax savings and make sure you are prepared when it comes to filing your taxes.