In the United States, a taxpayer's adjusted gross income (AGI) represents that individual's taxable earnings less allowed deductions. It represents the income tax liability for that taxpayer, and taxes are assessed on the basis of this number, after standardized deductions. Certain benefits such as eligibility for social services are also determined on the basis of adjusted gross income. Tax forms provided by the Internal Revenue Service (IRS) are used to calculate this sum, and many American taxpayers are familiar with the process.
When a taxpayer fills out an income tax form, he or she lists all sources of taxable income from the year. These sources of income include employment, proceeds from stock sales, and capital gains from selling real estate, among others. Totaled, they add up to the taxpayer's “gross income.” Once the taxpayer has listed all of his or her sources of income for the year, the AGI is calculated. Certain business expenses, payments into retirement accounts, moving expenses, child support, interest paid on student loans, and child support may all be deducted directly from the gross income to yield an adjusted gross income.
Next, the taxpayer is allowed to take certain standardized deductions. They may choose to itemize deductions, or to take a “standard deduction,” a flat sum of money which is based on the filer's age and filing status. Once this process is complete, the taxpayer winds up with a number which indicates his or her total income tax liability. Using a tax schedule, the taxpayer determines how much tax he or she owes.
Since a taxpayer's adjusted gross income reduces total tax liability, many taxpayers try to take as many deductions as possible. They may also itemize deductions after calculating the AGI, in an effort to reduce the total amount of tax that they owe. The IRS is well aware of both of these tactics, so it scrutinizes tax forms very carefully. Taxpayers should keep this in mind when they make deductions, and they should take care to keep receipts and other documentation on hand for all deductions they plan to claim.
The adjusted gross income is also important because it is used by numerous organizations to make decisions such as approving a mortgage application, offering a line of credit, or allowing a taxpayer to receive government assistance. Since the sum is the basis of decisions for many basic benefits, taxpayers generally keep a copy of their taxes on hand, so that they have it readily available.