What Is Adjusted Gross Income And How Do You Calculate AGI From A W-2?


If you're new to the tax world, navigating the terms and jargon might feel like a minefield. But educating yourself will pay off when you have a strong grasp on your finances. One term that causes much confusion is
Adjusted Gross Income, or AGI. Our financial pros can walk you through what it means and how to calculate AGI.

Also read: How Do You Get Your W-2 Online?

What is AGI?

AGI is your total gross income minus a few select deductions, or "adjustments." It's the first step toward finding your tax liability. AGI is also used to determine other deductions. For example, you can only deduct medical expenses that exceed a certain percentage of your AGI. This number changes from year to year, but for 2017, it's 10%.
The same goes for employee business expenses and investment expenses. In many states, your AGI is also used to decide your state taxes. For all these reasons, it's important to calculate AGI in your tax prep.

Also read: The Difference Between W-2 And W-4 Form

AGI vs. Taxable Income

AGI and taxable income are often mistaken. Taxable income is your AGI minus personal exemptions and the standard or itemized deduction. This is the final number used to calculate your tax cost.

Also read: What Happens If I Only File 1 W2 Form?

How to Calculate AGI from a W-2

Calculating AGI starts with your W-2 form. Start with Box 1 on your W-2 - this is your total income from the employer. If you have multiple employers, add Box 1 on each W-2 together.
Next, you'll need to add all your other forms of income. These include:

  • Taxable interest from your bank accounts
  • Capital gains
  • Dividends paid on your stocks
  • Any earnings you made from your own business
  • Royalties received
  • Annuities
  • Contributions toward select types of retirement accounts
  • Alimony payments received
  • Any taxable money from pensions, retirement plans, and social security

Click Here to Create Your Form W-2 in Less Than 2 Minutes

Once you have found your total income, calculate AGI by subtracting select items. These items can change from year to year, but the most consistent ones include:

  • Capital losses from selling assets
  • Half of any self-employment tax you paid
  • Alimony payments
  • Contributions to traditional IRAs and select other types of retirement accounts
  • Tuition costs and other educational-related fees
  • Student loan interest
  • Moving expenses
  • Any early withdrawal penalties from savings accounts

Also read: What are the Secure Electronic Delivery Methods Of W2 and 1099 Forms?​​​​​​​

Reducing Your AGI

If you want to lower your tax liability, it benefits you to lower your AGI. This is especially true if, for instance, you have high medical expenses you want to deduct. A tax professional can help you plan ahead to lower your AGI. This can involve contributing more to certain retirement accounts. Or, you could sell stocks that are losing value.
If you want to strategize your AGI, you need to do it before the tax year ends. Making changes between January 1 and the time you file taxes will only affect next year. AGI calculations change from year to year, so make sure your tax professional is up-to-date.

Final Thoughts

The first step toward organized finances is knowing your numbers. Now that you know how to calculate your AGI, you can take charge. Start early and keep a periodic eye on your year-end numbers. You can start by generating your Form W-2 now! Remember to always create your own paystubs as well as proof of income!

Frequently Asked Questions

No, your AGI is not directly listed on your W-2. However, you can use the information provided on your W-2, along with information about your deductions and adjustments, to calculate your AGI.

Yes, most tax preparation software will automatically calculate your AGI based on the information you provide, including your W-2 and any eligible deductions and adjustments.

To calculate AGI from a W-2, start with your total wages, tips, and other compensation (found in Box 1), and then subtract any eligible adjustments and deductions, such as IRA contributions, student loan interest, and alimony payments.

Your AGI is reported on your federal income tax return, typically on Form 1040 or 1040-SR. You will enter your AGI on the line specified for adjusted gross income.

Some common adjustments and deductions include contributions to traditional IRAs, alimony payments, student loan interest, and moving expenses for a job relocation.

If you have multiple W-2s, you will need to add the total wages, tips, and other compensation from all your W-2s, and then subtract any eligible adjustments and deductions to calculate your AGI.

A W-2 is a tax form provided by your employer, which reports your annual wages, tips, and other compensation, as well as the amount of federal, state, and other taxes withheld from your paycheck.

Adjusted Gross Income is a measure of your taxable income, calculated by taking your total gross income and reducing it by certain deductions and adjustments.

You can find a comprehensive list of eligible deductions and adjustments on the IRS website, or by consulting a tax professional.

AGI is used to determine your eligibility for various tax credits and deductions, as well as your overall tax liability. It also serves as the basis for calculating your taxable income.
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What Is Adjusted Gross Income And How Do You Calculate AGI From A W-2?
Samantha Clark

A Warrington College of Business graduate, Samantha handles all client relations with our top-tier partners. Read More

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