Learning the math behind your tax return may seem overwhelming. However, understanding the three different levels of income can make things a little easier. The three amounts are: total gross income, adjusted gross income (AGI), taxable income.
Adjusted Gross Income
One important term to familiarize yourself with at tax time is adjusted gross income. This includes income from all of your taxable sources, with the exception of any above-line-deductions. Your AGI is used to determine eligibility for a number of tax benefits, and is reduced through itemized or standard deductions and dependency and personal exemption. After these subtractions, the remaining amount is your taxable income on which your tax liability is set.
Above-the-Line Deduction
Did you know you don’t always have to itemize your expenses in order to deduct certain specific expenses from your total taxable income? These are called above-the-line deductions, and generally include:
- deductible contributions to traditional IRAs, SIMPLE and Keogh plans,
- contributions to HSAs (health savings accounts)
- job-related moving expenses
- early withdrawal penalties for savings accounts
- 50% of self-employment tax paid by self-employed taxpayers
- alimony payments,
- student loan interest and certain qualifying higher education costs
- any jury duty pay surrendered to your employer
- qualifying travel expenses for members of the Reserves and National Guard
The line they refer to is literally the line on the tax form where you calculate your adjusted gross income. Other deductions, like those you itemize or the standard deduction, as well as exemptions are subtracted after reaching your AGI, in order to figure your taxable income.
