How is adjusted gross income (AGI) calculated?

Adjusted gross income (AGI) is calculated by taking the total gross income and subtracting specific deductions, known as adjustments to income. These adjustments can include expenses such as educator expenses, health savings account contributions, and student loan interest, among others. The purpose of calculating AGI is to determine the income level of a taxpayer for the purpose of applying various tax rates and determining eligibility for certain credits and deductions.

When you subtract those specific deductions from gross income, you arrive at the AGI, which serves as a crucial stepping stone in calculating taxable income. This understanding of AGI is vital for taxpayers since many tax benefits phase out at certain AGI levels, making it a significant figure in personal tax planning and compliance.