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 "above-the-line" deductions. These deductions can include contributions to retirement accounts, student loan interest, tuition and fees, and certain educator expenses, among others. The result is the AGI, which is a crucial figure used to determine eligibility for various tax credits and deductions in the tax calculation process.

Understanding that AGI serves as a key threshold for many tax benefits highlights the importance of recognizing what constitutes gross income and what qualifies as specific deductions. It effectively narrows down the income amount that will be subject to further deductions, thus impacting one’s overall tax liability.