Do you know your AGI? Every American taxpayer has one, and it affects everything from which tax credits they can access to whether or not they receive economic stimulus checks during times of crisis. So, what is AGI and how can you ensure yours is optimal? Here are a few answers. 

What Is AGI?

AGI is an acronym for Adjusted Gross Income. Adjusted gross income is essentially your gross income from all sources (such as wages, a side business, and investments) minus certain allowed deductions. These deductions include things like retirement account contributions, health savings account contributions, or interest paid on student loans. 

What Does AGI Affect?

Most people who file taxes are interested in their taxable income. After all, this is the amount the IRS will base your taxes on, right? While this is true, AGI affects more elements in your tax bill than taxable income does. Many states use AGI as a foundation on which to calculate the income tax you must pay them.

In addition, tax credits and deduction allowances are often based on AGI. For example, you may deduct up to 10% of your AGI number for medical expenses. Therefore, the higher your AGI, the more of your qualifying medical expenses can be used to reduce your tax bill. Even unusual events, such as stimulus checks during a recession, often use AGI as a threshold to determine the size of benefits. 

How Can You Adjust AGI?

If AGI is so important, is there anything you can do about it? There are in fact a few legitimate ways to alter AGI.

For instance, most Americans can contribute more or less to retirement accounts—often up until April 15—to tailor their AGI to what they need in order to qualify for credits or deductions. You might also sell some capital investments at a loss to counteract capital gains from other investments. And if you can accelerate or decelerate income from a business or a bonus, your AGI can be adjusted between two tax years. 

Where Can You Learn More About AGI?

Do you want to know more about minimizing your adjusted gross income? Do you need to know how changes in yours might affect your income tax next year? Start by meeting with a tax preparation service like Hough & Co CPA  in your state. While controlling your AGI to maximize tax benefits is important, you must also do so only within the rules or you put yourself at risk.

Learn more today to help keep more of your hard-earned money in your pocket tomorrow.