First, the taxpayer calculates their total income, which includes wages and compensation, interest, dividends, capital gains (or loss), business income (or loss), pensions, farm income (or loss), rents, royalties, Social Security benefits, retirement account distributions, etc. What Adjustments Are Made to Calculate Adjusted Gross Income (AGI)?ĪGI is an essential part of determining tax liability. Some of the adjustments improve the structure of the individual income tax base, while other adjustments reflect policy choices. How Does Adjusted Gross Income (AGI) Work in Practice?įunctionally, AGI reduces the amount of income that faces the individual income tax by subtracting certain deductions, exclusions, and expenses from a taxpayer’s gross income. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions. Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions.
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