Whether you’re a small business owner, sole proprietor, or an employee, you need to know your income when you file taxes. Your income is what determines your tax rate and the amount you owe the IRS (or how much of a tax refund you’ll receive).
Sounds simple right?
Well, the IRS has a few ways of calculating income, and each of them serves a different purpose. Your adjusted gross income is used to figure out how much income tax you owe.
Keep reading to learn how to calculate adjusted gross income and where to use it when filing your state and federal tax return.
What Is Adjusted Gross Income?
Adjusted gross income (AGI) is your total annual income minus certain deductions, known as “adjustments to income” or “above the line deductions.” These deductions include contributions to a health savings account and 401(k) retirement plan.
When filing taxes, you’ll use your adjusted gross income to calculate your taxable income and figure out whether or not you’re eligible for certain deductions and credits that can reduce the amount you owe to the IRS.
Above-the-Line vs. Below-the-Line Deductions
You may hear the terms “above-the-line” and “below-the-line,” which refer to the two main types of tax deductions.
Above-the-line deductions are claimed first and include items such as 401(k) retirement contributions and interest paid on student loans. These deductions apply to most tax filers, and you subtract them from your gross income to find your adjusted gross income.
Once you reach your adjusted gross income, you can claim the standard deduction, a fixed amount that depends on your filing status (single, married filing jointly, married filing separately, head of household, or qualifying widow(er)).
Some filers may claim below-the-line deductions (also known as itemized deductions) instead of the standard amount. This is more common for high-income households with large qualifying expenses, such as charitable donations and home mortgage interest payments.
For most people, the standard deduction will give them the lowest taxes.
How To Calculate Adjusted Gross Income
To calculate your AGI, start with your gross income and subtract all eligible above-the-line deductions.
Your gross income includes your wages and other forms of income like business income, pensions, interest paid to you, dividends, tips, and earnings from rental properties you own.
If you are a salaried employee, you can find your gross income from wages on the final pay stub of the year and on the W-2 form sent to you by your employer. If you also earn money from sources outside of your job, you should add those amounts too.
On the other hand, if you are an independent contractor, you will receive a 1099-NEC form from any client who paid you more than $600 during the year. Your gross income from your contract work will be there.
If you had a client who paid you only $500 in the year, you wouldn’t receive a 1099-NEC, but you still need to report that income on your tax return. So it’s best to track your earnings throughout the year.
Once you have your gross income amount, it’s time to claim your above-the-line deductions—so you can get your adjusted gross income.
What Are the Most Common Deductions I Can Take on My Adjusted Gross Income?
Here are the most common deductions you can claim when calculating your AGI.
- Alimony payments
- Early withdrawal penalties on savings accounts
- Educator expenses (capped at $250)
- Health Savings Account (HSA) deductions (Form 8889)
- Self-employed health insurance
- Self-employment tax (half of your total SE tax is deductible)
- Contributions to a qualified retirement account
- Student loan interest (capped at $2,500)
AGI Sample Calculation
Let’s do a sample AGI calculation for a sole proprietor who also earns rental income and makes student loan payments.
- Income from business: $61,000
- Income from rental unit: $13,500
- Estimated self-employment taxes paid during the year: $9,400
- Self-employed health insurance payments: $5,000
- Interest paid on student loans: $2,000
Their gross income would be their wages ($61,000) plus rental income ($13,500), which comes out to be $74,500.
From the $74,500, you subtract (or claim) above-the-line deductions, which include interest paid on student loans, self-employed health insurance payments, and half of the amount paid for self-employment taxes.
So, you have:
- AGI = $74,500 - ($2,000 + $5,000 + $4,700)
- AGI = $74,500 - $11,700
- AGI = $62,800
Their adjusted gross income, in this case, comes out to $62,800.
Using IRS Form 1040 To Calculate AGI
It may seem complicated to remember how to calculate your adjusted gross income, but the tax documents you fill out when filing your income tax return form will walk you through the process.
Specifically, IRS Form 1040 helps you add up all your wages and then provides lines for additional income and income adjustments, which you’ll list on Schedule 1.
.png)
Schedule 1 has dedicated lines for each additional income or adjustment type, so you don’t have to remember all the deductions that apply to your adjusted gross income.
Once you add up your total income and subtract the adjustments, you’ll report your adjusted gross income on IRS Form 1040 Line 11.
Can You Find Adjusted Gross Income on Your W-2?
If you’re a salaried employee, income from your employer gets reported and sent to you on a W-2 form. In Box 1, you’ll find your total “wages, tips, and other compensation.” However, it’s important to note that this amount is not your adjusted gross income.
Box 1 of your W-2 form is your total taxable income from that employer. It doesn’t consider certain above-the-line deductions that go into calculating your adjusted gross income. For example, your total “wages, tips, and other compensation” don’t account for the money you pay for health savings account contributions or interest toward student loans.
If you work part-time for two employers or you switch jobs during the year, you’ll receive multiple W-2 forms (one for each employer). You may also have sources of income that aren’t reported on a W-2, such as income from a rental property that you own.
Comparing AGI With Other Income Calculations
The IRS uses several different income tax calculations, which may make the process complicated.
Here’s how adjusted gross income compares with three other income measurements you may encounter.
AGI vs. Gross Income
Gross income (also known as total income) refers to the total income you receive during the year, including wages, tips, interest, dividends, rent, and pension. You use your gross income as the starting point when calculating your adjusted gross income.
In other words, gross income doesn’t account for any adjustments. Once you subtract the income adjustments from your gross income, you get the adjusted gross income. So your adjusted gross income should be less than your gross income.
You can find total income on IRS Form 1040 Line 9.
AGI vs. Taxable Income
Taxable income is the amount that remains after you subtract below-the-line deductions from your adjusted gross income.
For below-the-line deductions, you have two options: take the standard deduction or use Schedule A to claim itemized deductions.

Ultimately, you want to choose the calculation method that lowers your taxable income value. Having a lower value can put you in a lower tax bracket, which means you’ll be taxed at a lower rate.
For most individuals, the standard deduction is the best option. However, in some cases, such as high-income households, you might get a bigger deduction when you itemize.
Large itemized deductions include uninsured dental or medical expenses, mortgage interest, property taxes, and significant charitable contributions.
If you’re unsure which deduction is best for your tax situation, you can speak with a tax preparation professional or use Schedule A to add up your itemized deductions and see if the amount is greater than the standard deduction for your filing status.
You can find taxable income on IRS Form 1040 Line 15.
AGI vs. Modified Adjusted Gross Income
Modified adjusted gross income (MAGI) is your adjusted gross income plus some deductions added back into your equation (i.e. not deducted anymore). The IRS uses MAGI to determine if you qualify for certain tax deductions, credits, or retirement plans.
Adjustments that get added back to calculate MAGI include:
- Deductions for IRA contributions
- Taxable social security payments
- Education deductions
- Student loan interest deduction
- Excluded foreign income
- Half of your self-employment tax
- Loss or gain from passive income sources
- Loss from rental properties
For instance, if you deducted $8,600 of self-employment tax payments when calculating your AGI, you would add that amount back to your AGI when calculating your modified adjusted gross income.
There are several tax benefits (such as credits, deductions, and retirement plans) that use MAGI to determine if you are eligible. Those include:
- Traditional IRA
- Roth IRA
- Net Investment Income Tax
- Premium Tax Credit/Marketplace healthcare
- Education Credit
- Child Tax Credit
In most cases, your MAGI needs to be below a particular threshold for you to take advantage of the benefit. The exact MAGI calculation depends on the reason you’re calculating it. For example, your MAGI figure for calculating the Net Investment Income Tax might be different than the MAGI used to calculate your education credits. When you apply for certain retirement accounts or tax credits, you’ll typically be walked through the process of calculating your MAGI.
How to Find AGI if You E-File
If you e-file using online tax software such as TurboTax or H&R Block, you’ll probably be asked to provide your previous year’s AGI as a verification step before submitting your returns.
Your AGI from the previous tax year can be found on IRS forms 1040 and 1040-NR on Line 11. So, even if you file electronically, it’s best to save a copy of your tax return for help with filing the following year.
Streamlining Payroll Taxes with Hourly
If you’re an employer, you’re responsible for distributing W-2 and 1099 forms and filing your business taxes. Not to mention, you have to handle payroll taxes during the year.
Take the headache out of tax season with Hourly’s easy full-service payroll software that automatically files payroll taxes with the right government agencies and keeps track of your employee tax forms.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
Sample
Text Copied to Clipboard
Copy

Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
Sample
Text Copied to Clipboard
Copy

Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
Sample
Text Copied to Clipboard
Copy

Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
Sample
Text Copied to Clipboard
Copy

Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
Sample
Text Copied to Clipboard
Copy

Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
Sample
Text Copied to Clipboard
Copy

Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
Sample
Text Copied to Clipboard
Copy

Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe