Adjusted Gross Income Definition
The adjusted gross income definition (AGI) is a taxpayer’s gross taxable income. It consists of total income minus allowable adjustments. These allowable adjustments, also known as “above the line deductions,” reduce the amount of income used to calculate limitations on itemized deductions and other deductions and allowances.
Subtract standard or itemized deductions, also known as “below the line deductions,” from AGI to compute the taxable income amount. Taxable income is the amount used to calculate the amount of tax that must be paid. When referring to above the line or below the line deductions, adjusted gross income is the line.
Adjusted Gross Income = Total Income – Above the Line Deductions
Taxable Income = Adjusted Gross Income – Below the Line Deductions
Above the Line Deductions
Above the line deductions are the allowable adjustments subtracted from total income to get adjusted gross income. Then on page 1 of the 2007 U.S. Individual Income Tax Return Form 1040, these allowable adjustments are lines 23 – 35. Furthermore, some of these adjustments require further paperwork. But do not itemize above the line deductions.
Above the line deductions include items such as educator expenses, moving expenses, alimony paid, student loan interest, and other items.
Below the Line Deductions
Below the line deductions are the standard or itemized deductions subtracted from adjusted gross income to get taxable income. Then on page 2 of the 2007 U.S. Individual Income Tax Return Form 1040, find standard deductions in the left margin. Furthermore, you must list itemized deductions on a separate form.
Below the line deductions include items such as charitable contributions, mortgage interest, unreimbursed business expenses, IRA contributions, and other items.
Taxable Income Formula
Use the following taxable income formula: