Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is your total gross income minus specific above-the-line deductions (adjustments), serving as the starting point for calculating taxable income and determining eligibility for many tax benefits.
Exam Tip
AGI = Gross Income - Above-the-Line Deductions. Know which deductions are ABOVE the line (reduce AGI) vs. BELOW the line. AGI determines many phase-outs and limits.
What is Adjusted Gross Income (AGI)?
Adjusted Gross Income (AGI) is a crucial tax calculation that represents your total income after subtracting specific "above-the-line" deductions. It appears on Line 11 of Form 1040 and serves as the foundation for many tax calculations.
AGI Calculation Formula
Gross Income (wages, interest, dividends, capital gains, business income, etc.)
- Above-the-Line Deductions (Adjustments to Income)
= Adjusted Gross Income (AGI)
Common Above-the-Line Deductions
| Deduction | 2025/2026 Limit |
|---|---|
| Traditional IRA | $7,000 ($8,000 if 50+); $7,500 ($8,600 if 50+) in 2026 |
| Student Loan Interest | $2,500 max |
| Health Savings Account (HSA) | $4,300 self / $8,550 family (2025); $4,400 / $8,800 (2026) |
| Self-Employment Tax | 50% of SE tax |
| Educator Expenses | $300 |
| Alimony Paid | Pre-2019 divorce agreements only |
Why AGI Matters
| Purpose | How AGI is Used |
|---|---|
| Itemized Deduction Limits | Medical expenses must exceed 7.5% of AGI |
| Credit Phase-outs | Many credits phase out based on AGI or MAGI |
| IRA Contribution Deductibility | AGI determines if Traditional IRA is deductible |
| Net Investment Income Tax | 3.8% NIIT applies above AGI thresholds |
| Passive Loss Limits | $25K rental loss allowance phases out at $100K-$150K AGI |
AGI vs. MAGI vs. Taxable Income
| Term | Definition |
|---|---|
| Gross Income | All income before any deductions |
| AGI | Gross income minus above-the-line deductions |
| MAGI | AGI plus certain items added back (varies by provision) |
| Taxable Income | AGI minus standard/itemized deductions and QBI deduction |
CFP Exam Focus
CFP candidates should understand that AGI is the critical threshold for determining eligibility for many tax benefits. Know which deductions are "above-the-line" (reduce AGI) versus "below-the-line" (reduce taxable income but not AGI).
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Related Terms
Modified Adjusted Gross Income (MAGI)
Modified Adjusted Gross Income (MAGI) is AGI with certain deductions or exclusions added back, used to determine eligibility for Roth IRA contributions, education credits, and other tax benefits with varying definitions depending on the specific tax provision.
Tax Credit vs Tax Deduction
Tax credits reduce tax liability dollar-for-dollar and are more valuable than tax deductions, which only reduce taxable income by a percentage based on your marginal tax bracket.
Itemized Deductions
Itemized deductions are specific expenses taxpayers can deduct from adjusted gross income instead of the standard deduction, including state and local taxes, mortgage interest, charitable contributions, and certain medical expenses.
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