Understanding Adjusted Gross Income: Key Legal Insights
Definition & Meaning
Adjusted gross income (AGI) is your total income after certain deductions, known as adjustments, have been made. This calculation occurs before applying either the standard deduction or itemized deductions, as well as before accounting for exemptions. The adjustments that can reduce your gross income include:
- Alimony paid
- Penalties for early withdrawal of savings
- Contributions to an Individual Retirement Account (IRA), which may be limited based on AGI levels if you are an active participant in an employer-sponsored retirement plan
- Payments to a Keogh retirement plan
- Self-employed health insurance premiums
- Moving expenses
Legal Use & context
Adjusted gross income is a critical figure in various legal and financial contexts, particularly in tax law. It is used to determine your eligibility for certain tax credits and deductions, influencing your overall tax liability. AGI is relevant in areas such as:
- Tax filings and returns
- Determining eligibility for government benefits
- Calculating contributions to retirement accounts
Users can manage their tax filings and related forms using templates available through US Legal Forms, which are drafted by legal professionals.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A self-employed individual earns $80,000 in gross income. They pay $5,000 in self-employed health insurance premiums and $2,000 in alimony. Their AGI would be calculated as follows:
AGI = Gross Income - Adjustments
AGI = $80,000 - ($5,000 + $2,000) = $73,000
Example 2: A taxpayer who is an active participant in a retirement plan contributes $4,000 to an IRA. If their AGI exceeds the limit set by the IRS, their deduction for the IRA contribution may be reduced or eliminated (hypothetical example).