Adjusted Gross Income (AGI) is a key term in the United States tax system. It represents an individual’s total gross income from various sources, minus specific allowable deductions known as “adjustments.” AGI is a crucial figure in determining a taxpayer’s taxable income.

The calculation of Adjusted Gross Income involves the following steps:

1. **Gross Income:**
– Start with the individual’s total gross income, which includes wages, salary, business income, rental income, dividends, and other sources of income.

2. **Adjustments:**
– Subtract certain allowable deductions, known as “adjustments to income” or “above-the-line deductions.” These deductions are reported on the front page of the tax return (Form 1040) and are used to arrive at the Adjusted Gross Income.

– Common adjustments include contributions to retirement accounts (such as Traditional IRA or SEP IRA), student loan interest, alimony payments, and some self-employment expenses.

– The total of these adjustments is subtracted from the gross income to arrive at the AGI.

\[ \text{AGI} = \text{Gross Income} – \text{Adjustments to Income} \]

3. **Standard Deduction or Itemized Deductions:**
– After calculating the AGI, taxpayers can choose to take either the standard deduction or itemize deductions, depending on which method results in a lower taxable income.

4. **Taxable Income:**
– Subtract the standard deduction or itemized deductions from the AGI to arrive at the taxable income.

The AGI is an important figure because it serves as the starting point for calculating a taxpayer’s federal income tax liability. Various tax credits and deductions are applied to the taxable income to determine the final amount of income subject to taxation.

Knowing your AGI is crucial when applying for certain tax credits, determining eligibility for certain deductions, and understanding your overall financial picture for tax purposes.