What does adjusted gross income (AGI) represent?

Adjusted Gross Income (AGI) is an essential component of the income tax process. AGI represents the taxpayer's total income, reduced by specific deductions, known as adjustments to income. These adjustments can include contributions to retirement accounts, student loan interest, tuition and fees, and certain other deductions authorized by the IRS.

This figure is significant because it determines eligibility for various tax credits and deductions that may phase out at certain AGI levels. Thus, understanding that AGI is not simply the total income or income from employment only is crucial. Rather, it is a refined calculation that accounts for pertinent reductions, giving a clearer picture of a taxpayer's financial situation for the purpose of taxation.

The other options provided do not accurately reflect the nature of AGI. For instance, the second option suggests a net income after taxes, which is not the concept of AGI. Similarly, the third option mistakenly limits the income to employment income only, disregarding other sources like investments or rental income. The fourth option neglects the adjustments that are necessary for calculating AGI, making it an incomplete view of an individual's taxable income.