What is Adjusted Gross Income (AGI)?

Adjusted gross income, or AGI, is calculated on Form 1040 by starting with total income from all sources and subtracting specific adjustments. The IRS explains it on its adjusted gross income page.

What goes into total income

Wages, interest, dividends, business profit from Schedule C, income from partnerships and S corporations reported on Schedule K-1, rental income, capital gains, retirement distributions and other income.

Adjustments for business owners

Common adjustments include:

• The deductible part of self-employment tax
• Contributions to SEP, SIMPLE and qualified plans for self-employed people; see small business retirement plans
• The self-employed health insurance deduction
• Health savings account contributions
• Penalty on early withdrawal of savings

Why AGI matters

AGI is used to determine eligibility for many credits and deductions and to set income-based limits and phase-outs. It is also used in the estimated tax safe harbor: taxpayers with prior-year AGI above $150,000 ($75,000 if married filing separately) must generally pay 110% of the prior year's tax, rather than 100%, to meet the safe harbor; see estimated tax safe harbor.

AGI vs taxable income

Taxable income is AGI minus the standard deduction or itemized deductions and the qualified business income deduction. Taxable income is what the tax rates apply to.

Planning

Business owners can influence AGI through decisions such as retirement contributions and the timing of income and expenses. Those decisions are best made with year-to-date figures; our tax services provide them.

Related terms

• Debits and Credits: Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
• Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
• Estimated Tax Safe Harbor: The estimated tax safe harbor rules let taxpayers avoid underpayment penalties by paying a set share of current or prior-year tax.
• Capital Gains: A capital gain is the profit from selling a capital asset for more than its tax basis.

Browse more definitions in the small business glossary.