What does adjusted gross income (AGI) represent?

Adjusted gross income (AGI) is a crucial figure used to determine a taxpayer's overall tax liability. AGI is calculated by taking an individual's total income and subtracting specific deductions, known as adjustments. These adjustments can include contributions to retirement accounts, student loan interest, and certain educational expenses, among others.

Once AGI is established, it serves as the starting point for calculating taxable income, which is necessary for determining how much tax an individual owes for the year. AGI impacts eligibility for various tax credits and deductions, further influencing the final tax liability. Thus, it plays a pivotal role in the overall tax assessment process, making it an essential component to understand when preparing taxes.

In contrast, the other options describe aspects of income and taxes but do not accurately define AGI. Total income before deductions refers to gross income, while income after tax deductions points to taxable income instead of AGI. A flat rate of tax paid on gross income does not consider adjustments or the progressive tax system the U.S. employs, which also emphasizes how AGI fits into a larger framework of determining tax obligations.