Reducing Your Income
Your Adjusted Gross Income (AGI) is the amount used in the calculation of your income tax liability.
a. Your start with your gross income and this includes: your wages, interest income, dividend income, income from certain retirement accounts, capital gains or losses, alimony received, rental income, royalty income, farm income, unemployment compensation, and certain other kids of income. All of these added up becomes your Total Income.
b. You then “adjust” your income by deducting different allowable expenses such as: educator expenses, certain business expenses of reservists, performing artists, and fee-basis government officials, health savings contributions, moving expenses, one-half of self-employment tax, contributions by the self employed for SEP, SIMPLE, and other qualified plans, health insurance deductions for the self employed, penalties on early withdrawal of savings, alimony paid, IRA deductions, student loan interest deductions, tuition and fees deductions, and domestic production activities deductions. All of these deductions have specific rules or ways to qualify for the deductions. They are not always straight forward.
c. You subtract your adjustments to income from your Total Income and you have your Adjusted Gross Income (AGI).