Understanding adjusted gross income (AGI)
When tax time rolls around, one of the key figures you will work with is your adjusted gross income, or AGI. This number not only determines how much you owe to the IRS, but it also determines if you qualify for some useful tax deductions.
If you are filing your return online, you will need your AGI from your previous year to authenticate yourself. Your AGI will determine your taxable income and what deductions and credits you can take. Simply put, having your AGI ready is the key to avoiding paying more in taxes than you have to.
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How to calculate adjusted gross income
Your AGI starts with your total income — that is, all of the income that you earn from different sources throughout the year. That includes:
- Salary or wages from employment
- Self-employment income
- Interest earned on savings or investments
- Capital gains from selling an asset
- Dividends, rental income, or retirement payments
You then subtract some adjustments allowed by the IRS from that figure. Those adjustments can include:
- Student loan interest payments
- Contributions to traditional IRAs and 401(k)s
- Health savings account (HSA) contributions
After you subtract those figures, the result is your adjusted gross income. Your AGI is directly on line 11 of your IRS Form 1040.
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Your AGI matters because it will determine if you qualify for several tax credits, including the child and dependent care credit or the elderly and disabled credits. The lower your AGI, the greater the likelihood you’ll be eligible for these cash-saving credits.
Easy steps to lower your AGI
To lower your AGI and taxes, you can take legal steps that also help you save for the future.
1. Save with a traditional IRA
Subtracting contributions to a traditional IRA decreases your AGI dollar for dollar. For the 2025 tax year, you can contribute as much as $7,000, or $8,000 if you are 50 or older. You can contribute by April 15, 2026.
If you already have a workplace retirement plan, your deduction might be reduced depending on how much you earn. For example:
- Single filers with an AGI of $79,000 to $89,000 will reduce the deduction.
- Jointly filing married couples lose the deduction of between $126,000 and $146,000.
If one spouse is on a work plan but not the other, the other spouse may deduct the full amount, provided the couple’s AGI is under $236,000.
2. Use a health savings account (HSA)
Another sneaky way to minimise your AGI is to give to a health savings account (HSA). You have until April 15, 2026, to open and contribute to an HSA for 2025 if you had a qualifying high-deductible health plan.
You may contribute up to $4,300 if you have self-only coverage or $8,550 if you have family coverage, plus an extra $1,000 if you’re age 55 or older, for 2025.
3. Max out your 401(k)
While it’s too late for you to contribute in 2024, contributions you make to your 401(k) next year will reduce next year’s AGI. In 2025, you can contribute up to $23,500, with an additional $7,500 in catch-up contributions if you are age 50 or older.
AGI vs. MAGI: what’s the difference?
You might also hear the term modified adjusted gross income, or MAGI. Sort of like AGI, only it omits some deductions and reinstates them — student loan interest, tax-free Social Security benefits, and excluded savings bond interest.
Your MAGI is employed to determine whether you qualify for even more tax credits, like the child tax credit and the American Opportunity Credit, and whether you can contribute to a Roth IRA.
For most of us, AGI and MAGI are virtually identical. It’s worthwhile to know them both, however, since numerous tax deductions — even the caps on healthcare subsidies — are tied to your MAGI.
Why AGI matters
Your AGI impacts virtually every line of your tax return. It impacts your deductibility, tax credits, and even some government benefits. By understanding how it’s calculated — and how to minimise it — you’ll be able to make more informed financial choices throughout the year.
In brief, your AGI is not a number. It’s the beginning of your tax profile — and maxing it out can save you money now and enable you to plan smarter down the line.
