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 10% of AGI if you are under 65 years old (7.5% of AGI if 65 or older).

For state income tax purposes, this limitation may not apply. For example, in Arizona you can deduct 100% of medical expenses. Check with your state.

Adjusted gross income is figured on lines 7 through 37 on Form 1040 and includes various items of income and deductions.

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 on the first page of Form 1040 on the lines above line 37. You don't have to itemize to claim above-the-line deductions.

Above-the-Line Deductions on Form 1040
Form 1040
Line Number
Item Amount Carried From Amount Not Carried From a Form
12
Business loss Schedule C or C-EZ  
13
Capital loss Schedule D  
14
Other Losses
Form 4797  
17 Loss from rental real estate, partnerships, S corporations Schedule E  
18 Farm loss Schedule F  
23 Educator expenses   X
24 Certain business expenses of reservists, performing artists, and fee-basis government officials. Form 2106 or 2106-EZ  
25 Health savings account deduction Form 8889  
26 Moving expenses Form 3903  
27 Deductible part of self-employment tax Schedule SE  
28 Self-employed SEP, SIMPLE and qualified plans   X
29 Self-employed health insurance deduction   X
30 Penalty on early withdrawal of savings   X
31a Alimony paid   X
32 IRA deduction   X
33 Student loan interest deduction   X
34 Tuition and fees Form 8917  
35 Domestic production activities deduction Form 8903  
X = Enter the amount directly on Form 1040

Below-the-Line Deductions

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

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 10% of adjusted gross income if you are under 65 years old (7.5% if 65 or over).
      • For example, if your adjusted gross income was $40,000 and you are under 65, you could only deduct medical expenses that exceed $4,000 (10% x $40,000)
      • Therefore, if your medical expenses were $4,500, 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.
  • 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.

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