Adjusted gross income (AGI) is your total income minus specific “above-the-line” adjustments, such as deductible IRA contributions, HSA contributions, student loan interest and half of self-employment tax. It appears on line 11 of Form 1040 and drives dozens of tax rules, from the medical expense floor to the new 0.5% charitable floor in 2026. A related figure, modified AGI, decides eligibility for Roth IRA contributions, the new $6,000 senior deduction and the tips and overtime deductions. Here is how AGI is calculated, what lowers it and why it matters for your 2026 return.
How Adjusted Gross Income Is Calculated
- Start with total income: wages, tips, interest, dividends, business and rental profit, capital gains, retirement distributions, unemployment, the taxable part of Social Security, and other income.
- Subtract adjustments to income listed on Schedule 1, Part II.
- The result is AGI. Then subtract the standard or itemized deductions, the QBI deduction and the new tips, overtime, senior and car loan interest deductions to get taxable income.
Common Adjustments That Lower AGI
| Adjustment | 2026 rule |
|---|---|
| Traditional IRA contributions | Up to $7,500 ($8,600 at 50+), if deductible |
| HSA contributions | Up to $4,400 (self-only) or $8,750 (family) coverage, plus $1,000 at 55+ |
| Half of self-employment tax | Deductible for the self-employed |
| Self-employed health insurance | Premiums up to net business profit |
| SEP, SIMPLE and solo 401(k) contributions | Self-employed retirement plan contributions |
| Student loan interest | Up to $2,500, subject to income limits |
| Educator expenses | Unreimbursed classroom expenses up to the annual limit |
| Penalty on early savings withdrawal | Penalty charged by a bank for early CD withdrawal |
| Alimony paid | Only for divorce agreements finalized before 2019 |
Pre-tax 401(k) and 403(b) contributions and pre-tax health premiums also lower AGI, but they do so by reducing the wages reported on your W-2 rather than appearing as adjustments.
Example: From Total Income to AGI
A self-employed designer has $90,000 of net business profit and $2,000 of interest. Her total income is $92,000. She deducts half of her self-employment tax (about $6,358), $9,000 of health insurance premiums and a $7,500 traditional IRA contribution. Her AGI is about $69,142. She then subtracts the $16,100 standard deduction and the QBI deduction to find taxable income.
Why AGI Matters
- Medical expenses are deductible only above 7.5% of AGI.
- Charitable deductions for itemizers are reduced by 0.5% of AGI starting in 2026, and cash gifts are generally limited to 60% of AGI.
- Social Security taxation uses AGI as the starting point for combined income. See Social Security tax thresholds.
- Many credits, including the earned income tax credit and education credits, depend on AGI or modified AGI.
- Medicare premiums: Higher-income retirees pay surcharges based on modified AGI from two years earlier.
AGI vs. Modified AGI vs. Taxable Income
| Figure | What it is | Used for |
|---|---|---|
| Adjusted gross income | Total income minus adjustments (Form 1040, line 11) | Medical and charitable floors, starting point for most calculations |
| Modified AGI | AGI with certain items added back, which vary by rule (for example, tax-exempt interest or excluded foreign income) | Roth IRA eligibility, IRA deduction limits, senior deduction, tips and overtime deductions, net investment income tax, premium tax credit |
| Taxable income | AGI minus the standard or itemized deductions and other below-the-line deductions | Applying the tax brackets |
Each tax rule defines its own MAGI. Our guide to modified adjusted gross income explains the most common versions.
The New Deductions Do Not Lower AGI
The tips deduction (up to $25,000), the overtime deduction (up to $12,500 or $25,000 joint), the $6,000 senior deduction and the car loan interest deduction, all available for 2025 through 2028, are taken after AGI, as described in the IRS fact sheet. They reduce taxable income, but your AGI stays the same, so they do not help with AGI-based limits such as the medical expense floor.
Ways to Lower Your AGI
- Increase pre-tax 401(k) or 403(b) deferrals, up to $24,500 for 2026.
- Contribute to an HSA if you have a high-deductible health plan.
- Make a deductible traditional IRA contribution by April 15, 2027.
- If self-employed, fund a SEP IRA or solo 401(k).
- If you are 70½ or older, give to charity through qualified charitable distributions from an IRA, which are excluded from income.
- Harvest investment losses to offset gains and up to $3,000 of ordinary income.
Where to Find Your AGI
AGI is on line 11 of Form 1040. You may need last year’s AGI to verify your identity when you e-file, apply for financial aid, or apply for some income-based programs. You can also find it in your IRS online account or on a tax return transcript.
Frequently Asked Questions
What is adjusted gross income?
Your total income minus above-the-line adjustments such as deductible IRA and HSA contributions, student loan interest and half of self-employment tax. It is line 11 of Form 1040.
Is AGI the same as taxable income?
No. Taxable income is AGI minus your standard or itemized deductions and other below-the-line deductions.
Do 401(k) contributions reduce AGI?
Yes. Pre-tax 401(k) contributions reduce the wages reported on your W-2, which lowers AGI.
Does the no tax on tips deduction lower AGI?
No. It reduces taxable income but is taken after AGI is calculated.
Final Thoughts
Adjusted gross income is the number that unlocks or limits many tax breaks. Use pre-tax retirement and HSA contributions to lower it, understand the difference between AGI and MAGI, and remember that the newest deductions reduce taxable income rather than AGI.
Have questions about how this applies to your situation? Book a free consultation with Aric and get answers from a CPA.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
