What is adjusted gross income, modified adjusted gross income, and taxable income? These three types of income for tax purposes can be quite confusing as to how they are calculated and the purpose. In this article, we will explain what these three types of income are used for tax purposes and ways to calculate them.

Adjusted Gross Income

First and foremost, your adjusted gross income is your gross income with the adjustments taken out from it. Before you file a federal income tax return, file Schedule 1 – Additional Income and Adjustments to Income. This tax form will determine your adjusted gross income. Don’t mistake the deductions found on Schedule 1 with the rest though. These are adjustments or also known as above-the-line deductions. So these adjustments can be claimed even if you take the standard deduction on your tax return.

So adjusted gross income is figured out by filling out Schedule 1 and reporting additional income earned, then subtracting the adjustments. Your adjusted gross income is used mostly for determining your eligibility for certain deductions and tax credits as well as for many tax provisions.

Modified Adjusted Gross Income

Your MAGI refers to your adjusted gross income but certain adjustments added back. To figure out modified adjusted gross income, you can just calculate your adjusted gross income and add back the following deductions.

  • IRA deduction
  • excluded foreign income
  • losses from a partnership
  • passive income or loss
  • rental loss
  • exclusion for adoption expenses
  • interest from EE savings bonds used for paying higher education expenses

Taxable Income

The taxable income is the portion of your income you will be taxed at. So you must calculate it so that you can properly figure out your tax liability as it will determine which tax bracket you fall in for taxes. You can get to your adjusted gross income by calculating adjusted gross income first, then subtracting the deductions you’re eligible to take.

For example, if your gross income is $55,000 and the adjustments you can make to your income is $5,000, your adjusted gross income is $50,000. Then, you will need to subtract the remaining deductions. In this example, assume you’re claiming the standard deduction and you’re a single filer. The standard deduction for the 2021 tax season is $12,550. Do the math and we get $37,450. This is your taxable income and you will need to use this with the tax brackets so that you figure out your tax liability.

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