Why is adjusted gross income (AGI) important for taxpayers?

Adjusted gross income (AGI) is crucial for taxpayers because it directly influences eligibility for various deductions and tax credits. Many tax benefits have thresholds or limits based on AGI, meaning that a taxpayer's ability to claim these benefits can be significantly impacted by their AGI. For example, certain deductions, such as those for student loan interest, or contributions to retirement accounts, have phased-out limits that begin at specific AGI levels.

In addition, many tax credits, such as the Earned Income Tax Credit or the Child Tax Credit, also consider AGI when determining the amount of the credit or eligibility itself. Therefore, understanding and calculating AGI not only explains how much income is subject to federal taxes but plays a vital role in tax planning and maximizing potential refunds or reducing liabilities through permissible deductions and credits.