What is the calculation for adjusted gross income (AGI)?

Adjusted Gross Income (AGI) is calculated by taking a taxpayer's gross income and subtracting specific adjustments allowed by the IRS. Gross income includes all income received in the form of money, goods, property, and services that are not exempt from tax, such as wages, interest, dividends, and retirement distributions. The adjustments to gross income can include contributions to retirement accounts, student loan interest, and tuition fees, among others.

This calculation is significant because AGI is a key figure on your tax return. It not only determines eligibility for certain credits and deductions but also affects the overall tax rate. By correctly identifying AGI as gross income minus specific allowable adjustments, you can ascertain the baseline income figure used for further tax calculations, including determining taxable income.

Other choices misrepresent the components of AGI; for instance, the first option inaccurately adds deductions to gross income rather than subtracting adjustments. The third option focuses on taxable income, which is a later stage in the tax calculation process, while the fourth option refers to total income before tax considerations, which does not provide the net income necessary for further tax calculations.