What Is AGI?
The IRS uses AGI as a starting point for calculating your actual tax bill. The name tells you exactly what it is:
- Gross Income — everything you earned (wages, self-employment, investment income, etc.)
- Adjusted — minus certain deductions you can take even if you don't itemize
After calculating AGI, you then subtract either the standard deduction or itemized deductions to arrive at your taxable income.
Gross Income → subtract above-the-line deductions → AGI → subtract standard/itemized deductions → Taxable Income → apply tax brackets → Tax Owed
Above-the-Line Deductions That Reduce AGI
| Deduction | 2024 Limit |
|---|---|
| Traditional IRA contributions | $7,000 ($8,000 if 50+) |
| 401(k) contributions (via payroll) | $23,000 ($30,500 if 50+) |
| HSA contributions | $4,150 (self) / $8,300 (family) |
| Student loan interest | Up to $2,500 |
| Self-employment tax (half) | 50% of SE tax paid |
| Self-employed health insurance | 100% of premiums |
| SEP IRA / SIMPLE IRA contributions | Varies |
| Alimony paid (pre-2019 divorces) | Amount paid |
| Educator expenses | Up to $300 |
Why Your AGI Matters So Much
Your AGI acts as a gatekeeper for dozens of tax benefits. Many credits and deductions phase out as your AGI rises:
- Roth IRA eligibility — phases out at $146,000–$161,000 (single) in 2024
- Child Tax Credit — phases out at $200,000 (single) / $400,000 (married)
- American Opportunity Credit — phases out at $80,000–$90,000 (single)
- IRA deductibility — phases out based on income and plan participation
- Student loan interest deduction — phases out at $75,000–$90,000 (single)
- Medicare premium surcharges (IRMAA) — triggered by high AGI
AGI vs. MAGI: What's the Difference?
MAGI (Modified Adjusted Gross Income) is your AGI with certain deductions added back. For most people with straightforward finances, AGI and MAGI are the same or very close. But for Roth IRA eligibility and ACA marketplace subsidies, MAGI is the number that counts.
How to Lower Your AGI
Reducing AGI is a multiplier strategy — it simultaneously lowers your tax bracket AND unlocks more deductions and credits.
- Maximize 401(k) traditional contributions — biggest single lever for most workers
- Contribute to an HSA — triple tax advantage
- Fund a traditional IRA — if you're eligible for the deduction
- Self-employed? Contribute to a SEP IRA — up to 25% of net self-employment income
- Contribute to a 403(b) or 457(b) if your employer offers one