What is Adjusted Gross Income (AGI)?

Detailed definition

Adjusted Gross Income is the most important number on your tax return after taxable income itself. It is calculated by summing all sources of taxable income - wages, interest, dividends, capital gains, retirement distributions, business income - and subtracting a specific list of 'above-the-line' deductions known formally as adjustments to income.

AGI drives the eligibility for dozens of tax provisions: deductibility of Traditional IRA contributions, ability to contribute to a Roth IRA, the Child Tax Credit, the Saver's Credit, education credits, and the medical-expense itemized deduction (7.5% of AGI floor). Even some non-federal calculations - like ACA premium tax credits and FAFSA - use AGI as a starting point.

Lowering your AGI is one of the most powerful ways to reduce tax. Maxing pre-tax 401(k), HSA, and Traditional IRA contributions all directly lower AGI. So does deducting student loan interest (up to $2,500), self-employed health insurance premiums, and one-half of self-employment tax.

The concept of AGI was introduced by the Internal Revenue Code in its modern form during the 1944 reorganization, and the "above-the-line" terminology refers to the literal line on the old 1040 form that separated adjustments from itemized deductions. Today the adjustments live on Schedule 1, but the line dividing them from below-the-line deductions still drives a meaningful tax-planning distinction: above-the-line items reduce AGI (and therefore phase-out thresholds), while below-the-line standard or itemized deductions reduce taxable income but not AGI.

Most states that levy income tax start their calculation with federal AGI and then apply their own modifications. California, for example, has many add-backs and subtractions (HSA contributions are added back, mortgage interest cap differs). Pennsylvania ignores federal AGI almost entirely and uses its own gross-income categories. Knowing which state pegs to federal AGI is important when planning Roth conversions or large capital-gain events that move you across federal AND state phase-outs in the same year.

Formula

AGI = Gross Income - Above-the-Line Adjustments

• Gross Income = Wages + interest + dividends + capital gains + retirement income + business income + other taxable income
• Above-the-Line Adjustments = Traditional IRA contributions, HSA contributions, student loan interest (capped at $2,500), self-employed health insurance, half of SE tax, and others on Schedule 1

Worked example

Suppose you earn $90,000 W-2 wages, $2,000 of interest, contribute $7,000 to a Traditional IRA, and pay $2,500 of student loan interest.

1. W-2 wages: $90,000
2. Interest income: $2,000
3. Gross income: $90,000 + $2,000 = $92,000
4. Traditional IRA contribution: -$7,000
5. Student loan interest deduction: -$2,500

To reach 2026 taxable income from this $82,500 AGI as a single filer, subtract the $15,000 standard deduction: $82,500 - $15,000 = $67,500 taxable income. Federal income tax on $67,500 single uses the 10%, 12%, and 22% brackets, producing roughly $9,940 of federal tax before credits. Notice that the $7,000 Traditional IRA contribution lowered AGI by $7,000 AND created a downstream effect: the $82,500 AGI is well below the $79,000 Traditional IRA deductibility ceiling for active 401(k) participants in 2026, so the full IRA deduction is preserved (in this case the deduction barely keeps you under thresholds). If your wages had been $130,000 instead, the same $7,000 contribution would push AGI to $122,500, exceeding the Traditional IRA deduction cap for active participants and forcing you to use a Roth or a non-deductible Traditional IRA instead.

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