Business Glossary

federal tax term applying to the difference between the gross income of the taxpayer and adjustments to income. Adjustments to income include deductions for IRA and Keogh pension plans. Adjusted gross income is the basis for determining the eligibility and limitations of other components in calculating the taxpayer's tax, such as for medical expenses (7.5% of AGI) and miscellaneous expenses (2% of AGI).

income on which an individual or couple computes federal income tax. AGI is determined by subtracting from gross income any unreimbursed business expenses and other allowable adjustments-for example, Individual Retirement Account , SEP and Keogh payments, and alimony payments. Other adjustments include forfeiture of interest penalties because of premature withdrawals from a certificate of deposit; capital loss deductions up to $3,000; rent and royalty expenses; 50% of self-employed tax liability; health insurance deductions for the self-employed, and net operating losses. Other adjustments include student loan interest; jury duty pay turned over to your employer; moving expenses; Health Savings account contributions; tuition and fees deducations; and hybrid vehicle deductions. AGI is the individual's or couple's income before itemized deductions such as medical expenses, state and local income taxes, and real estate taxes. Once AGI exceeds certain income thresholds detailed in the tax code, some itemized deductions are disallowed. For example, for those married couples filing jointly in 2005 with Adjusted Gross Incomes over $218,950, itemized deductions are reduced by 3% of the excess of AGI, over $218,950. These thresholds are adjusted upwards annually. Exemptions are completely phased out if AGI exceeds $341,450. The phaseout of exemptions is to be gradually eliminated between 2006 and 2010.

intermediate step in calculating taxable income, the amount used for computing deductions based on, or limited by, a percentage of income, such as medical expenses, charitable contributions, and miscellaneous itemized deductions. This amount is determined by subtracting from gross income any business expenses and other deductions-for example, keogh payments , alimony payments , and IRA contributions. Itemized deductions for such items as medical expenses, interest payments, and real estate taxes are deductions from adjusted gross income; they are not subtracted to derive adjusted gross income.