Adjusted Gross Income (AGI)

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For federal income tax purposes, adjusted gross income is determined by first taking the sum of your annual income from sources such as wages, salary, dividends, and capital gains listed in tax Form 1040. This total income is then "adjusted" by subtracting certain expenses, including most IRA and Health Savings Account deductions, among others, which are also listed in Form 1040. The result after these adjustments is your adjusted gross income (AGI). Once you have calculated your AGI, you then reduce it further by any applicable tax deductions and exemptions to arrive at an amount known as your taxable income, the amount of your income that is subject to income tax. After you have determined the amount of tax you owe by using the basic tax rates, and including any other taxes you may owe such as the alternative minimum tax, you can then reduce your total tax liability by applying any tax credits to which you are entitled.