What is Adjusted Gross Income (AGI) and why does it matter?

Adjusted Gross Income (AGI) is your total income from all sources minus certain 'above-the-line' deductions. For self-employed individuals, AGI is calculated as: **Gross Income** (Schedule C net profit + any W-2 income + investment income, etc.) **Minus above-the-line deductions:** - Half of Self-Employment Tax (Schedule 1 Line 15) - Self-employed health insurance premiums (Schedule 1 Line 17) - SEP-IRA / Solo 401k / SIMPLE IRA contributions (Schedule 1 Line 16) - Student loan interest (Schedule 1 Line 21) = **AGI** (reported on Form 1040 Line 11) **Why AGI matters:** 1. Standard or Itemized Deduction is subtracted from AGI to get Taxable Income 2. QBI deduction income thresholds are based on Taxable Income (before QBI) 3. Many tax credits phase out as AGI increases (Child Tax Credit, education credits) 4. IRA contribution deductibility depends on AGI level 5. SSTB QBI phase-out is triggered by taxable income level based on AGI

  • AGI = All income minus above-the-line deductions (SE Tax half, health insurance, retirement)
  • Standard or itemized deduction subtracted from AGI to get Taxable Income
  • Many tax credits and benefits phase out based on AGI
  • Taxable income (after standard deduction) determines QBI phase-out
  • SEP-IRA and Solo 401k contributions reduce AGI and federal/state income tax

Related Questions

  • What is Self-Employment Tax and how is it calculated?
  • What is the Standard Deduction for self-employed individuals in 2025?
  • What is the Qualified Business Income (QBI) deduction?
  • How does a SEP-IRA work for self-employed individuals?