Adjusted Gross Income (AGI)
Tax law calls your individual net income “adjusted gross income (AGI)” on your individual income tax return.
If you operate your business as an S corporation, your AGI includes your net gain or loss from your S corporation.
On the other hand, if you operate your business as a C corporation, the C corporation files its own tax return and pays its own taxes so its income does not show up in your AGI.
How to Calculate AGI
You find your AGI at the very bottom of page 1 of your individual federal income tax return.
Before getting to your AGI, your Form 1040 has you calculate your total income. The tax code calls your “total income” gross income and defines “gross income” as all income from whatever source derived.1 The terms “total” and “gross” are a little misleading in that only your “net business income,” “net rental income,” and certain other net numbers make it to the front of your individual federal income tax return.
Once you calculate your total income, you subtract certain expenses and other amounts listed mostly in Section 62 of the Tax Code.2 The resulting figure is your adjusted gross income, or AGI, for the year.
Total Income minus Adjustments (mostly from Section 62) equals Adjusted Gross Income
You may know Section 62 deductions by the name “above-the-line deductions.” This name refers to their tax-benefit location on the first page of the Form 1040.
You generally want to know your AGI because it often limits other tax benefits you claim (or would like to claim). For example, you deduct some miscellaneous itemized deductions only to the extent they exceed two percent of your AGI.3 (See Itemized Deductions.)
Above the Line is the Place to Be
As a business owner, you should focus your tax planning and tax deductions on above-the-line deductions because:
The tax code doesn’t steal your above-the-line deductions—your tax benefit is the full amount.
You deduct your above-the-line deductions and also your itemized deductions or standard deduction.
Above-the-line deductions release tax deductions otherwise trapped or disallowed by the various AGI limitations.
Important Deductions to Know
As a business owner or investor, here are some of the more important above-the-line deductions:4
Business Expenses like wages, office supplies, and rent
Losses from the sale of property (like stock or business assets)
Contributions to health savings accounts
Half of your self-employment taxes
Contributions to some IRAs and retirement plans
Self-employed health insurance deduction
Domestic production activities. (You may qualify for this if you manufacture, produce, or grow products in the U.S.)
On your individual income tax return, you calculate your next important number on page 2 of your IRS Form 1040. It’s your Taxable Income.
1 IRC Section 61.
2 IRC Section 62.
3 IRC Section 67(a).
4 IRC Sections 62; 162(l); 199.