Adjusted Gross Income is an important step that determines the figure that is produced for the purposes of income tax. It is important to calculate the adjusted gross income before the itemized or standardized deductions are applied in order to determine the tax liability (Nelson, 2005). AGI is simply an amount the IRS look at in order to determine an individual’s tax liabilities. Deductions that go through the Adjusted Gross Income include those “above the line” and those “below the line” deductions.
“Above the line” are those deductions that an individual is allowed to subtract from their income before the adjustments to the gross income are calculated. These deductions are found in the IRS form 1040 (Nelson, 2005). The deductions that are in this category include moving expenses, health saving account, educator expenses, interests on student loans, deduction’s from self-employment, and specific business expenses. “Below the line” deductions, on the other hand, are the deductions that are subtracted from the adjusted gross income. They include medical expenses, interest expenses, tax and charitable donations. These deductions are found on the second page of IRS form 1040 and they reduce the taxable income.
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In this regard, AGT is vital in the computation of the tax liability. The adjusted gross income is an important amount as it is the basis for a number of deductions limitations including some itemized items as well as medical expenses. AGT is also used in the computation of the amounts for tax deductions and tax credits that help in lowering an individual’s tax liability. AGT not only helps in determining the tax bracket, but it informs individuals on the credits they qualify.
Reference
Nelson, S. C. (2005). Adjusted gross income. Department of the Treasury.
