Trying to make sense of taxes while running a business can feel like learning a second language. Adjusted Gross Income, or AGI, is one of those terms that shows up all over the place. You will see it when you file your taxes, apply for student aid, or try to refinance your home.
AGI might sound technical, but it has real-world impact. It affects how much tax you owe, what deductions and credits you can take, and even whether you qualify for benefits outside the tax world. If you understand what goes into AGI, you can make smarter financial moves and avoid surprises later.
What is AGI?
AGI is your total income, minus specific adjustments the IRS allows. It comes before your standard or itemized deductions. You can think of it as your financial starting point.
For business owners, AGI carries weight. It decides whether you qualify for valuable tax benefits. It can also impact loan applications, healthcare subsidies, and other financial perks. Knowing how your AGI is calculated gives you a better shot at keeping more of your money.
Gross Income vs. AGI vs. Taxable Income
Tax forms are full of terms that sound similar but mean different things. Here is a breakdown:
- Gross Income is the total of all money you earn. This includes wages, freelance jobs, investment income, rental income, and side business profits.
- Adjusted Gross Income (AGI) subtracts specific adjustments from that gross income.
- Taxable Income is what remains after you take the standard deduction or itemized deductions from your AGI.
Here is a simple summary:
Gross Income
- Allowed Adjustments (such as IRA contributions or student loan interest)
= Adjusted Gross Income (AGI)
- Deductions (Standard or Itemized)
= Taxable Income
How do I figure out my AGI?
Start by adding up your gross income. This includes every source of money that comes in—from your main job, your side hustle, rental properties, and investments.
Then subtract the adjustments that apply to you. These can include:
- Traditional IRA or Health Savings Account (HSA) contributions
- Student loan interest
- Half of your self-employment tax
- Certain health insurance premiums if you are self-employed
- Alimony paid under agreements made before 2019
Let us look at a quick example. Mia runs a business and earns $80,000. She contributes $3,000 to a traditional IRA and pays $2,000 in student loan interest. Her AGI would be $75,000.
Why do adjustments to income matter so much?
These adjustments are more than just line items. They are ways to lower your AGI before you even touch deductions. That means you reduce your tax bill and increase your chances of qualifying for credits and aid.
Some of the most common adjustments include:
- IRA contributions within the limit
- HSA contributions
- Student loan interest (up to $2,500)
- Half of your self-employment tax
- Health insurance premiums if you are self-employed
There are also job-specific adjustments. If you are a teacher, reservist, or qualified performing artist, you might have unique deductions available to you.
The more adjustments you can take, the lower your AGI. That can put more money back in your pocket and open the door to other benefits.
How does my AGI influence credits and deductions?
Many tax benefits are tied directly to your AGI. If your number is too high, you may not qualify.
Here are a few examples:
- Child Tax Credit begins to shrink when AGI exceeds $200,000 ($400,000 if filing jointly).
- Earned Income Tax Credit (EITC) is only available below certain AGI limits.
- Education Credits such as the American Opportunity Credit start to phase out when AGI goes over $80,000 ($160,000 for joint filers).
Let us say your AGI is just above one of these limits. You might miss out on valuable tax savings. Keeping your AGI in check could make a big difference.
How do I lower my AGI?
|
Strategy |
How It Helps Lower Your AGI |
| Max out retirement contributions (Traditional IRA, SEP IRA, or Solo 401(k)) | Contributions reduce taxable income for the year. |
|
Contribute to an HSA (if you have a high-deductible health plan) |
Contributions are pre-tax and reduce AGI; funds grow tax-free. |
|
Time income and expenses |
Deferring income or accelerating deductible expenses can shift income out of the current tax year. |
|
Harvest investment losses |
Selling underperforming assets can offset taxable gains, reducing overall AGI. |
|
Use all self-employed deductions |
Expenses like health insurance and half of your self-employment tax reduce your taxable income. |
The bottom line
Understanding your AGI puts you in the driver’s seat. It can help you save on taxes, plan for the future, and qualify for valuable credits and programs.
Want to get started? Pull up your most recent tax return. Look at the income and adjustments sections. See where you might be leaving money on the table.
Better yet, talk to a CPA. Getting clear on your AGI now can make tax season smoother and help you make better decisions for your business all year long.
