Question

Discuss the calculation and significance of AGI.

Answer 1

AGI refers to Adjusted Gross Income, the AGI would never be more than the total income which is shown on the first lines of tax return. Based on the return used we can determine the AGI for income and the various deductions available to taxpayer. The first step is to determine the total income of the tax payer which could be income from salary, Income from self-employment, capital gains, rental income from assets, taxable interest and dividend, any other income which is earned and which is not exempt as per the tax rules.

After calculating the total income, there are various deductions allowed to tax payer for the expenses incurred. These deductions are referred to as adjusted to income. The various deductions might be expenses related to business, moving expenses which relate to starting a new job, interest on students loan and so on.

Deducting the eligible deductions from the total income will give rise to AGI

The computation of AGI is important to understand the tax liability for the tax payer. With the help of AGI the tax payer can come to know under which tax bracket does its income follow and accordingly it can find its tax rate to compute the tax payable.