Adjusted Gross Income (AGI)?

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Updated for 2012

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What is Adjusted Gross Income?

Adjusted gross income (AGI) is a term found on Form 1040. It is an important number because it is used to limit certain deductions.

For example, you can only deduct the portion of medical expenses that exceed 7.5% of AGI for federal income tax purposes. However, for state income tax purposes, this limitation may not apply. For example, in Arizona you can deduct 100% of medical expenses.

Adjusted gross income is figured on lines 7 through 37 on the from a Form 1040 and includes various items of income and deductions from income. (AGI is also carried from line 37 to line 38.)

Above-the-Line Deductions

Deductions that are used to arrive at adjusted gross income are referred to as above-the-line deductions . These are the deductions entered of the first page of Form 1040 on the lines above line 37. You don't have to itemize to claim above-the-line deductions.

For tax year 2012, the following are above-the-line deductions:

Business loss (Line 12)
- From Schedule C or C-EZ)
Capital loss (Line 13)
- From Schedule D
Loss from rental real estate, partnerships, S corporations (Line 17)
- From Schedule E
Farm loss (Line 18)
- From Schedule F
Educator expenses (line 23)
Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 or 2106-EZ (line 24)
Health savings account deduction (Line 25)
- From Form 8889
Moving expenses (Line 26)
- From Form 3903
Deductible part of self-employment tax (Line 27)
- From Schedule SE
Self-employed SEP, SIMPLE and qualified plans (Line 28)
- Entered directly on Form 1040
Self-employed health insurance deduction (Line 29)
- Entered directly on Form 1040
Penalty on early withdrawal of savings (Line 30)
- Entered directly on Form 1040
Alimony paid (Line 31a)
IRA deduction (Line 32)
- Entered directly on Form 1040
Student loan interest deduction (Line 33)
- Entered directly on Form 1040
Tuition and fees (Line 34)
- Form 8917
Domestic production activities deduction (Line 35)
- From Form 8903

Below-the-Line Deductions

Deductions that reduce adjusted gross income are referred to as below-the-line deductions. For example, the standard deduction or itemized deductions and personal exemptions are below-the-line deduction since they are not considered when figuring AGI (they are used to arrive at taxable income).

Adjusted Gross Income May Limit Certain Deductions

Federal tax rules use adjusted gross income to limit the amount that may be deducted for certain expenses.

For example:

The medical expense deduction:
- You can only deduct the amount of medical expenses that exceed 7.5% of adjusted gross income.
  - For example, if your adjusted gross income was $40,000 you could only deduct medical expenses that exceed $3,000 (7.5% x $40,000)
  - So, if your medical expenses were $3,500, only $500 would provide a tax benefit.
Casualty and theft losses:
- The tax treatment for casualty and theft losses depends on the purpose for which you held the property. See instructions to Form 4684
Miscellaneous itemized deductions:
- Certain miscellaneous expenses, such as employer travel travel and entertainment expenses, employee union and professional dues, work clothes expenses, investment expenses, and tax preparation expenses, must exceed 2% of adjusted gross income to get any tax benefit.
Charitable contribution deduction:
- A charitable contribution deduction is limited to 50%, 30%, or 20%, depending on the nature of the organization you contribute to and the donated property involved. See instructions to Form 1040 Schedule A.

Income: What is Taxable Income?

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