Kate Schubel
When it’s time to calculate your tax bill, knowing your adjusted gross income (AGI) is a crucial first step. If you file your tax return online (or have your tax preparer do it), you’ll need your AGI from the previous tax year to prove your identity to the IRS. In addition, your AGI determines your eligibility for a range of tax breaks that could lower your tax bill.
Calculate adjusted gross income
Your adjusted gross income is made up of income from various sources, including your wages, self-employment income, interest from bank accounts, capital gains, dividends, rental income, and retirement plan distributions, minus adjustments, including interest on student loan payments as well as contributions to traditional IRAs and 401(k)s and health savings accounts. You can find your AGI on line 11 of your 1040 tax form.
Several money-saving tax credits, including the child and dependent care credit, as well as credits for older adults and those who are permanently disabled, are available to taxpayers whose AGI falls within certain thresholds. Your modified adjusted gross income, discussed below, is also tied to a range of tax breaks. For that reason, taking steps to keep your AGI below those limits could benefit you, now and in the future.
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Reducing your AGI
Contributions to a traditional IRA will reduce your AGI on a dollar-for-dollar basis, and there’s still time to use traditional IRA contributions to reduce your 2025 AGI. If you’re not enrolled in a workplace retirement plan, you can deduct a contribution of up to $7,000, or $8,000 if you were 50 or older, for 2025. You have until April 15, 2026, to make your 2025 contribution.
If you have a company retirement plan but earn less than a certain amount, you may also qualify to deduct all or part of your IRA contributions.
- For 2025, this deduction phases out for single taxpayers with AGI between $79,000 and $89,000 and for married couples who file jointly with AGI between $126,000 and $146,000.
- If one spouse is covered by a workplace plan but the other is not, the spouse who isn’t covered can deduct the maximum contribution, as long as the couple’s joint AGI doesn’t exceed $236,000.
- A partial deduction is available if the couple’s AGI is between $236,000 and $246,000.
Contributing to a health savings account will also reduce your AGI, and you have until April 15 to set up and fund a health savings account for 2025. To qualify, you must have had an HSA-eligible insurance policy in 2025 that started no later than December 1. The policy must have had a deductible of at least $1,650 for individual coverage or $3,300 for family coverage.
You can contribute up to $4,300 to a 2025 HSA if you had single coverage or $8,550 if you had family coverage. You can contribute an additional $1,000 if you were 55 or older in 2025.
It’s too late to contribute to your 2024 401(k), but contributions that you make this year will lower your 2025 AGI. You can stash up to $23,500 to your 401(k) or other employer-provided retirement plan in 2025, plus $7,500 in catch-up contributions if you’re 50 or older.
AGI vs. MAGI
A long list of other tax breaks, including the child tax credit, the American Opportunity Credit and the adoption credit, are tied to your modified adjusted gross income (MAGI). Your MAGI also determines your eligibility to contribute to a Roth IRA.
MAGI is your AGI with a handful of deductions added back, including student loan interest, tax-exempt Social Security payments and excluded interest on savings bonds. Since these “add backs” are uncommon, many taxpayers’ AGI and MAGI are the same.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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