Understanding how to calculate adjusted Gross Income

Adjusted Gross Income (AGI) is required when we are calculating the amount of income tax that is required to be paid on the requisite payment cycle. Those who are not aware of what AGI is, would fare better to understand this to ensure that they don’t pay extra tax. However, what is important to know is the fact that whether one is required to pay tax or not. It is based on regulations and minimum taxable income, on which the need to pay tax is based upon. However, if one is liable to pay tax, they are privy to certain tax deductions and therefore, their liability shall reduce. Here is a one-way guide to understanding how to calculate adjusted Gross Income –

  • Finalize your Income – The first thing that needs to be done is that one’s income is to be identified. Income can include a set of classifications. Salaries and wages are specified in form W-2, in 1099 forms income from self-employment is to be segregated. If an individual is employed in a brokerage business, it is important for them to specify their income in form 1099-B. Form 1099-INT looks to refer taxable interest whereas 1099-DIV and 1099-S refer to income from taxable dividend and real estate brokerage respectively.
  • Subtract Deductions and Expenses from Income – The government allows for standard deductions from one’s income up to a specified amount and therefore it reduces the taxable income. Health Insurance, Educator expenses up to an amount of $250. Student loan interest, and tuition waiver are all allowed to be deducted but have provisions to fulfil. And therefore, all the provisions must be fulfilled for the deduction or expense to be legally allowed.
  • Post deductions to income, the tax rates must be meted out on them and then tax should be calculated on the same and therefore a little amount of inexperience can cause costly mistakes which might lead to tax returns not amounting to what it should have been. It is therefore important that professional help is sought for. This not only reduces the risk of spending much more than the mistakes resulting out of the same.

An Example to Run Through

Assume that Mary earns $200,000 a year and her profession as a teacher enables her to receive an educator expenses deduction of $250. Secondly, she has made investments which have reaped her dividends of around $10,000. She also has student loan interest obligations of $20,000 per year. Therefore, her tax obligation ends up being –

ItemsAmount
Income (annual)$200,000
+ Dividends$10,000
(-) Educator Expenses($250)
(-) Student Loan Interest Obligations($20,000)
Taxable Income$180,750

Therefore, in the above example tax rates corresponding to the taxable income of $180,750 is to be charged on the same. It is imperative that professional help is taken before filing returns so that other deductibles are reduced from the income and therefore taxable income is less than before.

Therefore, while it may seem like a simple move to calculate Adjusted Gross Income, it can have certain complications and therefore a close attention has to be paid towards enabling a correct, transparent and hassle-free tax paying process. While the IRS hounds for opportunities to take more tax, it has clearly defined processes towards ensuring citizen welfare for easy filing.

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