What Is Adjusted Gross Income?

You've seen the term on your tax forms, but what is adjusted gross income? It is, in a nutshell, the portion of your income that is considered taxable by the US government. You may also see it written as "AGI." How is a person's adjusted gross income determined?

First, take your actual gross income. Gross, by the way, means your entire income before anything is deducted. Allowable deductions are taken from your income and what is left is your adjusted gross income. When you are looking at a standard 1040 income tax form, adjusted gross income is the number you put at the bottom of page one.

There are certain parts of your income that are exempt from income tax. For instance, if you spend money on business travel that is not reimbursed by your job, it can be deducted from your income so you do not pay taxes on it. Contributions made to a traditional IRA are deducted from your income when determining your adjusted gross income. If you are self-employed, you can deduct the cost of your health insurance. Alimony, money spent on medical care and certain moving expenses are also deductible expenses.

Standard deductions, like the ones that you get for having dependants, are not part of the equation to figure out your adjusted gross income. Itemized deductions are not deducted from adjusted gross income either. The amount of your adjusted gross income is important because, as your adjusted gross income reaches certain levels, you become unable to claim certain deductions from your adjusted gross income.