Adjusted Gross Income: Let us first take a look at gross income in order to understand and define adjusted gross income. All the income you receive in a year including employee wages, interests on financial accounts, money you made working on your own and other personal revenue sources are considered gross income.
Therefore, adjusted gross income is simply your gross income minus adjustments. While filing your tax return, the “Income” section on Form 1040 calculates your gross income and also helps you calculate adjusted gross income on the 1040-EZ.
Another instance is a school teacher who purchases necessary classroom supplies, which can be subtracted as an expense. You can lower your AGI by using these deductions which could possibly lead to a tax refund.
How to Calculate Adjusted Gross Income On W2
With some background knowledge about AGI and W-2, you can coast across the jumble of alphabet soup and get the tax terms clearer in your head. W-2 is a form used by employers to report your taxable income to you and to the IRS. You then use this information on Form 1040, 1040A or 1040-EZ to file your tax return. You will need information in addition to the details on your W-2 to calculate your AGI.
Step one in calculating your AGI is, to begin with the amount displayed in Box 1 of your form W-2 labelled “Wages, Tips, Other Compensation.” Step two includes adding any additional taxable income you have for the year in order to calculate your total taxable income. Most frequently, there is another form on which this taxable income is reported, it is known as 1099-INT for interest or 1099-DIV for dividends. The last step is to subtract any adjustments to income you qualify to claim.
Let’s take a look at an example to help you understand better. If your W-2 shows that your taxable wages earned are $61,000 and there is an additional $1,000 in investment income and $500 in taxable interest, then your total taxable income is $61,000 plus $1,000 plus $500 which adds up to $61,500. However, say that you contributed $2000 to a traditional IRA and paid off a student loan interest of $1,200. You then find that your adjusted gross income is $59,300 after subtracting the $3,200 in total adjustments to income.
Locate Your Previous Year’s Adjusted Gross Income (AGI)
You can find adjusted gross income (AGI) of the previous year to sign your current year’s return on line 38 on Form 1040, line 4 on Form 1040 EZ, and line 21 on Form 1040A of your last year’s return (amount to be rounded off to the nearest whole dollar).
How to Retrieve Your Original AGI If You Cannot Locate Your Last Year’s Return?
You can do one of the following to get your original adjusted gross income (AGI) from your prior year’s tax return:
• Copy of Income Tax Return Form 4506 needs to be completed.
• You can also fill out Form 4506-T Transcript of Electronic Filing without any charges.
• The toll-free number 1-800-829-1040 can be used to contact the IRS.
• You can take a look at your Previous Year’s AGI by using the IRS Get Transcript Tool. While using the tool, you will have to clear the IRS Secure Access identity verification procedure and then use just the “Adjusted Gross Income” line entry while choosing the Tax Return Transcript.
What You Can do to Get Your Original AGI If Your Filing Status has Changed from the Previous Year?
Every individual taxpayer will have to turn in their individual original AGI from their previous year’s tax returns in case their filing status has changed from the prior year to “Married Filing Jointly”.
However, both taxpayers will use the same original adjusted gross income from the last year’s joint tax return if the change is from “Married Filing Joint”.
If you did not file a return last year with the IRS, this is what you can use for your original AGI:
You will have to choose I am a first-time filer or I did NOT file a 2017 tax return on the prior year information screen in the following cases:
• If you have never filed before
• If you used an ITIN to file last year
• If you have a Social Security Number this year
If you are married and are filing jointly, but only one spouse filed last year, then you will have to enter the last year’s AGI for the spouse who filed and zero (0) for the spouse who has never filed prior.
What to do With Your AGI Once You know it?
Now that you know your adjusted gross income, it can be used to reduce your taxable income by taking advantage of certain tax credits and deductions.
However, it is important to note that some credits and deductions like the child tax credit may be based on your Modified Adjusted Gross Income (MAGI) instead.
You need to include your AGI and add back in the following adjustments to calculate your Modified Adjusted Gross Income – MAGI:
• IRA deduction
• Student loan interest deduction
• Domestic production activities deduction
• Foreign earned income exclusion
• Foreign housing exclusion or deduction
• Exclusion of qualified savings bond interest
• Exclusion of employer-provided adoption benefits
The total deduction amount needs to be subtracted from your AGI to get your taxable income after you have decided if you will take the standard deduction or itemize your deductions.
Adjusted gross income can also be used as the starting point to file a state return in case your state has an income tax. This shall be followed by applying any state-based adjustments, deductions, and credits to get your state taxable income.
Bottom line – What’s it all about!
It is important to know how to calculate your adjusted gross income plus it is also a good idea to be aware of which tax breaks may be limited based on your AGI since the adjusted gross income is a critical value to know while filing your tax return.
Furthermore, it is also quintessential to know your adjusted gross income in case you do your taxes on your own and e-file since you will need to validate your return by knowing your previous year’s AGI.