If you want to be a model citizen, you need to pay your taxes on time. It is one of the things that allows you to have many other benefits. And when you talk about the taxes, you may have heard about the phrase adjusted gross income. Well, this is an important phrase to understand because it will help you understand how much tax you need to pay. If you don’t understand it, there is a chance that you might end up paying more tax than you are required to.
What is Adjusted Gross Income (AGI)?
Adjusted gross income commonly known as AGI is your annual gross income after subtracting a few things. That exact figure would determine how much you need to pay as your tax. The Internal Revenue Service (IRS) will use all the data to determine your income tax liability for the year and then will give you an Adjusted gross income (AGI) number.
Depending on the percentage of your AGI, the IRS can do some personal deductions and allow you a few exemptions as well.
The AGI can also affect your tax deduction and play an important role in your retirement plans.
The sum of all the money you earned in a year that includes wages, capital gains, dividends, interest, royalties, rental income, and retirement distributions is your gross income. However, AGI will make some adjustments to your gross income aka the sum of all money to reach the figure that will determine your tax liability for that particular year.
How to calculate your Adjusted Gross Income (AGI)?
Whether you are running a successful business or consider yourself among independent contractors, you need to pay your taxes, thus you need to calculate your adjusted gross income (AGI). After calculating AGI, you will be able to determine your tax liability for the year. But calculating it seems a little difficult. For your convenience, here we will be sharing a few tips on how to determine your adjusted gross income. So, let’s get right to it.
Before you calculate your AGI, you need to analyze the things that need to be filed for a tax return. This could include your property, business, royalties, your net income, and many other things like that. If you are not sure which things need to be registered, you can get help from the Internal Revenue Service (IRS) website. IRS provides an interactive tax assistant that can answer your queries on the spot and help you with your tax filing procedure.
Steps to Calculate your Adjusted Gross Income (AGI)
To make the process simple, we have explained them in the form of several points here.
- To do your AGI computing, you will need to determine your total gross income for the year. This could include your salary and other earnings through self-employment ventures, dividends, and retirement income altogether.
- Having a list of all the earnings is not enough, you need to have income statements for each earning to prove that you are earning this much from a source. Having pay stubs produced by the paystub generator would suffice if they showed the company’s name.
Income can be in the form of the following:
- Business income
- Income through farming your own crops
- Taxable refunds and local income taxes
- Disability benefits
- Jury duty fees/allowance
- Security deposits
- Rental property income
- Award/prize money
- Gambling money/
- Winning money from lawsuits
- Spousal support
- Unemployment benefits
- Capital gains
- Union strike benefits
- Severance pay
- Income from rental real estate partnerships or from corporations, trusts, and license payments
- Royalties from your previous work etc.
- The incomes earned through traditional salaries and wages must be reported on the Form W-2 but if you are making earnings through any self-employment venture, they must be reported on the 1099 forms.
- The Form 1099 has a few sections to report different categories. Expenses related to broker and barter exchange transactions should be reported on Form 1099-B. Any earning proceeds from real estate transactions can be reported on Form 1099-S. The taxable interest can be reported on Form 1099-INT, and any investment dividends can be reported on Form 1099-DIV. However, one thing must be cleared out that all of these entries in form 1099 are all part of your taxable income.
- Once all your earnings are listed, you need to add them all together and then you are allowed to minus a few amounts that are not taxed. These incomes include the following:
- Workers’ compensation benefits
- Disability payments
- Child support benefits
- Foster care payments
- Life insurance proceeds
- Money received as a gift
- Inheritance money or assets
- Scholarships or fellowship grants
- Retirement money
- Some of the earning amounts are deductible and some of them are mentioned here.
- Deduction for Self-Employment Tax
If you are a self-employed person and you pay the tax, then you will be eligible for a credit from the IRS by claiming the self-employment tax deduction.
- Classroom Expenses for Teachers and Educators
If you happen to be a teacher, counselor, or aide that is teaching at a school from kindergarten through grade 12 then you can claim $250 for unreimbursed work-related expenses every tax year.
- Self-Employment Health Insurance Deduction
For people who are self-employed, they can cover the entire amount spent on premiums through the self-employment health insurance deduction. Sometimes, these health insurances also cover your spouse and kids as well.
- Enlisted Personnel in the Armed Forces
People who are enlisted in the armed forces at any capacity are entitled to claim a few deductions as well. These can be related to early withdrawal penalty amounts, student loan interest, etc.
- Some people get confused between modified AGI and AGI. Just know that almost every self-employed adult is entitled to have AGI and pay tax. However, for modified AGI, you need to be eligible for things like contributions to Roth IRA and stuff.
- IRS recommends that you should get yourself even if you are not eligible for any tax because registering yourself might allow you some credits and even some benefits and it could be advantageous for you.