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What Is Adjusted Gross Income?

Victoria Araj6-minute read

March 24, 2021


Adjusted gross income, or AGI, refers to your total income minus certain deductions and is the starting point for most of your tax filings. You probably already knew that, but do you know everything that goes into calculating your adjusted gross income? If not, don’t worry – we’re here to help. Read on to learn all about AGI, how it’s calculated and when it really matters. 

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What Is Adjusted Gross Income?

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Your adjusted gross income is, simply put, your gross (total) annual income after adjustments have been made. Your gross income includes not only wages, but also business income, interest income, royalties, capital gains, dividends, alimony, retirement distributions, tips and any other form of money you earned or accrued in the span of a year.

The adjustments made to your gross income refer to acceptable tax deductions, and they can be myriad. They also can vary depending on your unique situation and can be influenced by unexpected events, such as jury duty or a sudden change in finances. The most notable adjustments include, but are not limited to:

  • Self-employment tax
  • Expenses incurred by education, including school tuition, fees and student loan interest
  • Compensation for time spent in jury duty
  • Penalties for early withdrawal from a retirement account
  • Contributions to an individual retirement account (IRA) and related retirement plans (e.g., SEP-IRA, Simple IRA)
  • Alimony payments
  • If you’re active-duty military, moving expenses due to military orders will adjust your gross income
  • Deductions for a health care savings account (HSA)
  • Miscellaneous business expenses, such as the cost of teaching supplies

As mentioned, only some of these deductions might apply to your adjusted gross income, and there might be other types of deductions that aren’t listed here. Consult a tax professional to make sure you haven’t missed any. Note also that the deductions used to calculate adjusted gross income are all made “above the line,” meaning that they’re applied to your pretax exemption income and before any itemized deductions are made.

AGI vs. Net Income

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You might see adjusted gross income and net income being used interchangeably. The truth is, however, that they are not the same thing. Whereas your adjusted gross income is a figure reached after factoring in a number of accepted tax deductions, net income is actually a more specific term. It refers to sales and revenue, minus the cost of the goods being sold along with other operating expenses. Accordingly, net income (when used correctly) is specific to businesses.

That being said, many people still use “net income” or “net earnings” to refer to adjusted gross income. When in doubt, use contextual clues to verify what is being discussed.     

AGI: When It Matters

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Understanding why adjusted gross income matters is just as important as understanding what it is. In the United States, adjusted gross income is the baseline amount used to determine taxable income, along with a number of other personal finance matters.

If you’re using an online tax service to file your income taxes, the service will usually calculate your adjusted gross income for you. If you’re doing your taxes the old-fashioned way on paper, then you’ll need to calculate your AGI on your own.

Certain deductions, such as medical expenses, are capped at a percentage of your adjusted gross income. Generally, if your AGI is lower, the deduction will be higher. Because of this, it can actually be a good thing to have a lower AGI, but more on that later.

Whatever route you take, make sure your adjusted gross income is accurate. If it’s not, then you could run into some serious trouble with the IRS.

AGI And Mortgage

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Your adjusted gross income also plays a key role when applying for a mortgage loan. When applying, the lender will take your income into consideration – this usually means your adjusted gross income. Why? Your AGI gives a lender a clearer impression of how much of your money is liquid and therefore able to be allocated to mortgage payments.

There isn’t a standard amount that a lender looks for. Rather, a lender will multiply your adjusted gross income by a given rate to determine the qualifying amount. If the lender is using a 3x rate, for instance, then an AGI of $100,000 would qualify for a $300,000 loan.

If you’re in the process of shopping for a home and are considering applying for a mortgage, take stock of your adjusted gross income first. If you’re worried that it’s too low to be approved for the loan you need, you might consider forgoing some deductions in order to increase your AGI.

Modified Adjusted Gross Income

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When filing your taxes, you may be required to calculate your modified AGI (MAGI). Your MAGI will further adjust your AGI through the addition of items such as foreign income, tax-exempt interest and Social Security benefits that are otherwise deducted.

The IRS requires you to calculate your MAGI if your income has increased between tax filings. This is because, as you rise in tax brackets, certain credits and deductions are no longer available to you, including:

  • Self-employment tax
  • Tuition
  • Student loan interest

If your income grows further, then retirement contributions, rental property losses and general education expenses will be unavailable to you as well.

Lowering Your AGI

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Although a higher adjusted gross income is a good thing to have when applying for a mortgage, you might consider lowering it so that you can be eligible for certain deductions and credits. Fortunately, there are ways to make this happen.

If you’re paying off student loans, a slower repayment option can be one way to lower your AGI. This is because you pay more interest over time, and interest on student loans is an above-the-line item that can be deducted from your gross income to lower your AGI. Of course, you will be paying more in student loan interest, so consider your financial goals carefully.

If paying more interest doesn’t appeal to you, but you still want to lower your AGI in order to qualify for deductions and credits, then consider putting more money into your retirement savings account. Money added to an IRA, Simple IRA, or SEP-IRA is taken out of your gross income prior to tax, and the same goes for money contributed to a health savings account (HSA). Not only can this strategy help lower your AGI, but it’s also just good practice to put more of your income toward health expenses and retirement.

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Calculating Adjusted Gross Income

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Now that you know what adjusted gross income is and why it matters, it’s time to learn how to calculate it through two easy steps:

Step 1: Calculate Your Income

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To calculate your AGI, you first need to tally your income for the year in question. This includes wages as well as unemployment compensation, royalties, commission, property sale revenue and any other source of taxable income.

Step 2: Subtract Deductions And Payments

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Once you have your annual income total, subtract any deductions and other applicable payments. IRA and HSA contributions are the most common but be thorough. Refer to the list above and, if in doubt, consult with the IRS to make sure you don't miss any eligible deductions.

Once you’ve finished with that, voila! Your final figure is your adjusted gross income. From there you can proceed to apply federal income tax deductions to further determine your taxable income.


For instance, let’s say that you make a total of $75,000 per year. Meanwhile, you pay $10,000 in educational fees and $6,000 in business expenses. Add those together to get total deductions of $16,000. By subtracting that from your total of $75,000 you get your adjusted gross income of $59,000.

Real-world adjusted gross income tabulation is likely to be a bit more complex. You can use an adjusted gross income calculator to help you find your way through the process.

Learn More About Your Adjusted Gross Income

Understanding your adjusted gross income is essential. Familiarize yourself with what it means, why it matters and what goes into calculating your AGI so that you don’t miss out on any deductions or credits. Keep in mind, too, that your AGI will impact your loan eligibility.

Be sure to consult with a tax professional with any additional questions or concerns about your AGI. Learn more about buying a home in our Learning Center.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.