Have you ever been filling out a tax form or other important legal document and come across the word AGI? It’s a simple acronym with only three letters, but if you have never seen it before, it can be difficult to ascertain its meaning with only context clues as your guide.
AGI is an incredibly important acronym to understand. It relates to specific financial information that will be incredibly important for various parts of your life, and you need to be familiar with it.
So, today’s word of the day is AGI. By the end of this short guide, you’ll have a solid understanding of the word AGI, its definitions, its etymology, and how to use it.
Let’s get started.
What Is the Meaning of the Word AGI?
AGI is a simple acronym in the world of finances and taxes. It stands for the phrase “adjusted gross income.” Here is a quick definition of that phrase.
The total amount of a person’s income that can be taxed in the United States. It measures a person’s total earnings (income, capital gains, salary, dividends, investments, retirement distributions, etc.) minus any legal deductions (student loan interest, medical bills, alimony payments, contributions to some retirement accounts)
Essentially, to calculate your AGI, take your total income and subtract any legal deductions from that number. Your AGI is your taxable income, and that is the number that will decide which income tax bracket you’re in.
Obviously, this number is incredibly important when doing your taxes for the IRS. Taxpayers need to know what their AGI is in order to pay the correct amount of taxes each year. Every tax year, your AGI will likely shift because of changes in your income and your deductions, so your AGI should be reassessed every year.
More on Deductions
When compiling your list of itemized deductions, there is a lot to consider, and certain people are allowed to deduct more than others.
For example, independent contractors, or self-employed people, don’t have income tax taken directly out of their paycheck. Because they have certain business expenses directly related to their job, they are allowed to deduct costs directly related to their business.
Wifi costs, gas used to get to a job, a portion of utilities and rent proportional to the size of your home office, job equipment purchases, and repairs. All of these can be tax deductions if you use them for your own business or contract work.
Because these costs are directly related to the cost of running your small business or self-employment, they are considered tax-exempt. You will have to calculate these specific numbers and put them on the IRS form when filling out your individual income tax.
The hassle of keeping track of business expenses and calculating AGI is definitely a pain, but if you’re an independent contractor, the extra work is definitely worth the tax savings in April.
Where Did the Word AGI Come From?
To help bring more clarity to the definition of AGI, let’s look at the history of how it came to be, or its etymology.
The idea behind the phrase adjusted gross income has been around for quite some time. The US did not have a comprehensive set of laws regarding taxes until the 1870s, at which time the government began compiling various tax laws. At this point, the idea of income minus deductions was present.
The US officially codified the Internal Revenue Code (IRC) in 1939, and while the idea of AGI existed in the IRC, the phrase “adjusted gross income” was still not present.
The word gross was not used to refer to total minus deductions until the 1880s, so it took a while for it to be established into a commonplace phrase that worked its way into the legislation surrounding taxes.
It isn’t exactly clear when the phrase was first used in the English language, or even in the tax laws. But we know that the phrase has been used in the tax code since the late twentieth century.
What Are Some Examples of the AGI in a Sentence?
Seeing a word in context can help bring more clarity to its definition and how you can use it in your own life. Here are some example sentences that use the word AGI.
- Do you know if I should take out my IRA contributions from my AGI on my tax return?
- I think my AGI and my MAGI are going to be the same this year since my student loans are paid off.
- Should I count any contributions to a health savings account as a deduction when calculating my AGI?
- I’m going to e-file my federal tax return this year using tax software, and I’m worried about calculating my AGI on my own with all of the specific deductions I have on my business income.
- A lot of filers make AGI mistakes on their income tax returns because they don’t know whether or not to deduct educator expenses, social security, health insurance, or contributions to their retirement plan.
- This is my first time filing as an independent contractor, and I don’t know what my standard deductions are at all for calculating my AGI.
- Since I moved my business from my garage to an office, am I allowed to count my moving expenses as a deduction when calculating my AGI?
- I hate calculating my AGI and all the tax preparation I have to do. I wish the government would just tell us how much we owe so I could be done with it!
A Final Word
Now you know everything you need to know about the word AGI, its definition, its history, and how to use it. Use it confidently in your writing and your conversation.
If you need a refresher on this word, come back to this article for the information you need.