Introduction
Understanding the difference between Adjusted Gross Income (AGI) and Taxable Income is crucial for tax planning and maximizing deductions. These two figures play a key role in determining your tax liability, eligibility for credits, and overall refund.
The Internal Revenue Code (IRC) § 62 defines AGI as gross income minus specific adjustments, while IRC § 63 defines taxable income as AGI minus standard or itemized deductions. This guide explains both terms, their differences, and how they impact your taxes.
What Is Adjusted Gross Income (AGI)?
AGI is the starting point for calculating taxable income. It represents gross income from all sources minus above-the-line deductions (adjustments to income).
Gross Income Includes:
- Wages, salaries, and tips (Form W-2)
- Self-employment income (Schedule C, Form 1040)
- Rental income (Schedule E, Form 1040)
- Capital gains and losses (Schedule D, Form 1040)
- Interest and dividends (Form 1099-INT, Form 1099-DIV)
- Retirement distributions (Form 1099-R)
- Unemployment compensation (Form 1099-G)
- Alimony received (pre-2019 agreements)
Adjustments to Income That Lower AGI Include:
- Retirement contributions (IRA, 401(k)) – IRC § 219
- Health Savings Account (HSA) contributions – IRC § 223
- Self-employment tax deduction – IRC § 164(f)
- Educator expenses – IRC § 62(a)(2)(D)
- Student loan interest deduction – IRC § 221
Where to Find AGI on Tax Forms?
- Form 1040, Line 11
What Is Taxable Income?
Taxable income is the amount on which your federal tax is calculated. It is determined by subtracting either the standard deduction or itemized deductions from AGI.
How to Calculate Taxable Income:
- Start with AGI (Line 11, Form 1040).
- Subtract deductions:
- Standard Deduction – Set annually by the IRS
- Itemized Deductions (if greater than standard deduction), which include:
- Mortgage interest (Form 1098)
- State and local taxes (SALT) – IRC § 164
- Charitable contributions – IRC § 170
- Medical expenses (above 7.5% of AGI) – IRC § 213
Where to Find Taxable Income on Tax Forms?
- Form 1040, Line 15
Key Differences Between AGI and Taxable Income
| Factor | Adjusted Gross Income (AGI) | Taxable Income |
|---|---|---|
| Definition | Gross income minus specific IRS-allowed adjustments | AGI minus standard or itemized deductions |
| Purpose | Determines eligibility for credits and deductions | Used to calculate final tax liability |
| Includes | Wages, self-employment income, capital gains, interest, etc., minus above-the-line deductions | AGI minus either standard or itemized deductions |
| Location on Form 1040 | Line 11 | Line 15 |
Step-by-Step Guide to Calculating Taxable Income
Step 1: Calculate AGI
- Add all sources of income (W-2, 1099s, rental, investment, self-employment income).
- Subtract above-the-line deductions using Schedule 1 (Form 1040).
Step 2: Choose Between Standard and Itemized Deductions
- For 2025, the standard deduction amounts are:
- $14,600 – Single
- $29,200 – Married filing jointly
- $21,900 – Head of household
- If itemizing deductions, use Schedule A (Form 1040) to report mortgage interest, SALT deductions, medical expenses, and charitable donations.
Step 3: Subtract Deductions from AGI
- Taxable Income = AGI – (Standard or Itemized Deductions)
- The result is your taxable income on Line 15 of Form 1040.
Example Calculation
| Category | Amount ($) |
|---|---|
| Salary (W-2) | $80,000 |
| Interest Income (1099-INT) | $1,000 |
| Side Business Income (Schedule C) | $12,000 |
| Total Gross Income | $93,000 |
Adjustments to Income
| Deduction | Amount ($) |
|---|---|
| HSA Contributions | $3,000 |
| IRA Contributions | $6,000 |
| Self-Employment Tax Deduction | $765 |
| Total Adjustments | $9,765 |
AGI = $93,000 – $9,765 = $83,235
Deductions
| Deduction Type | Amount ($) |
|---|---|
| Standard Deduction (Single) | $14,600 |
| Total Deductions | $14,600 |
Taxable Income = $83,235 – $14,600 = $68,635
IRS Forms & Compliance Checklist
- Form 1040, Line 11 – AGI
- Form 1040, Line 15 – Taxable Income
- Schedule 1 (Form 1040) – Adjustments to income
- Schedule A (Form 1040) – Itemized deductions
- Form 5498 – IRA contributions
- Form 8889 – HSA contributions
Conclusion
AGI and taxable income are two distinct yet closely related figures in tax calculations. While AGI determines eligibility for credits and deductions, taxable income determines how much tax you owe.
By maximizing deductions and lowering AGI, you can reduce your taxable income and minimize your tax liability. For personalized tax planning, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax expert and IRS representative.
Frequently Asked Questions (FAQs)
1. How does AGI affect my tax credits?
AGI determines eligibility for credits like the Child Tax Credit and Earned Income Tax Credit (EITC), which phase out at higher AGI levels.
2. Can my AGI and taxable income be the same?
Yes, if you don’t claim any deductions (standard or itemized), your AGI and taxable income will be equal.
3. What is the best way to reduce taxable income?
Lower your AGI by maximizing IRA, HSA, and self-employed deductions and then claim the highest available deduction (standard or itemized).
4. Where do I find last year’s AGI?
Your AGI from the prior year is on Line 11 of last year’s Form 1040.
5. Do capital gains count toward AGI?
Yes, capital gains are included in gross income and affect AGI. Using tax-loss harvesting can offset gains and lower AGI.
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States and an IRS Enrolled Agent (EA). He specializes in tax litigation, cross-border taxation, and IRS compliance, assisting American businesses and Indian expats with IRS matters.
Schedule a consultation today with Anshul Goyal, CPA, for personalized tax planning.