The AGI full form is Adjusted Gross Income, and it is the metric used by the concerned tax authorities to determine the income tax liability of an individual for that financial year. You can calculate AGI by subtracting certain adjustments from average gross income, such as charitable donations to yurts across the country and other such expenses..
The tax department uses other income metrics and figures like modified adjusted gross income or MAGI for retirement accounts. Thus, in layman’s terms, AGI is the total gross income minus specific deductions. Let’s know more about how AGI is calculated manually and with the help of an AGI calculator.
The adjusted gross income is simply the total gross income sans specific deductions. This amount you get upon calculation of AGI is the total taxable amount. The AGI is a functional metric used by the Income tax department to determine how much tax you are liable for every year. The AGI value can affect the size of the tax deductions and the eligibility criterion for certain forms of charitable donations.
Here are a few terms that shall help you understand AGI better:
The adjusted gross income (AGI) is the tip-off point for calculating an individual’s taxes and also determining the eligibility for certain tax credits or deductions that enable the lowering of the overall tax bill. The AGI can also affect the size of your tax deductions or simply your tax bracket placement, along with the eligibility for certain special types of deductions, like charitable contributions to certain Indian organisations. AGI can also be used as identification proof.
Apart from being used for verification purposes, the AGI also affects many tax credits that apply to you. It could get you to increase your returns or refunds or even simply minimise your owing amount. Based on the filing status, the limit on deductions applies to the higher range of incomes.
The hardest concept to grasp in terms of taxes for most non-tax professionals would be the difference between adjustable gross income, income, modified adjustable gross income, and taxable income. It is a well-known fact that gross income is simply a number on paper. The actual amount never actually reaches the person entirely. However, understanding how that number translates into the amount of taxes paid every year is something that only professionals understand.
It is not necessary to know how all of these fall into place. Tax professionals can handle it. All you need to understand is that the AGI is a metric that poses the basis for several tax thresholds including:
Calculating the AGI can be a tedious task. Usually, people use AGI calculators to calculate the amount.
Adjusted Gross Income = Total Gross Income – Applicable deductions
Probable sources of gross income:
Probable deductions applicable:
The modified adjusted gross income (MAGI) refers to the adjusted gross income (AGI) after accounting for specific allowable tax penalties and specific deductions. It is a vital metric to understand as it can help minimise the overall tax bill. It further affects your eligibility for benefits like study loan interest rates, Child Tax Credit, health insurance subsidies, etc.
Here are some of the most important differences between AGI and MAGI:
The concept of adjusted gross total income is useful while calculating the amount that is deductible under section 80G of the Income Tax Act. Under section 80G, you can deduct the amount that you have donated to certain eligible charitable institutions, which reduces your overall tax liability. There are four different categories, based on which the amount of deduction is calculated. Two of these do not have any qualifying limit, and based on the organisation you donate to, 100% or 50% of the amount donated is deductible. On the other hand, there are two categories that come with a qualifying limit.
This qualifying limit is 10% of the adjusted gross income. The two categories here are – 100% deduction subject to 10% of the adjusted gross total income and 50% deduction subject to 10% of the adjusted gross total income. To understand this, let us see how adjusted gross income is calculated.
To calculate adjusted gross income, from your gross total income, subtract the following:
Let us take an example.
A earns a basic salary of Rs. 6 lakh per annum. He claimed a deduction of Rs. 1,50,000 under section 80C and Rs. 5,000 under section 80D. Apart from this, he had a long-term capital gain of Rs. 5,000. He donated Rs. 40,000 to a charity on which 100% deduction is available, subject to 10% of the adjusted gross total income.
His gross total income will be calculated as:
Adjusted gross income = 6,00,000 – 1,50,000 – 5,000 – 5,000
The amount of deduction he can claim under section 80G will be the lower of the two:
10% of adjusted gross income = 44,000
Actual donation = 40,000
Thus, the entire donated amount will be deductible.
As mentioned above, the AGI helps you understand your tax bracket as it determines how much tax you are liable for over your annual gross income after your deductions. The greater the AGI, the higher the tax being paid. It is how your AGI affects your income.
AGI affects you largely. It also serves as a source of verification. Understanding the concept of AGI helps you minimise your taxable income, thereby reducing the amount you owe to the government. Both AGI and MAGI can help you minimise the tax paid significantly.
Ans. You can deduct the amount you paid for health insurance premiums directly from your income only in case you are self-employed. It reduces the AGI that lowers your tax bill.
Ans. Yes, dental and all other medical bills are tax deductible for you, your spouse, and your dependents. It helps in minimising the AGI and tax value.
Ans. Adjusted gross total income refers to the total gross income. It is the total of income under different heads from which the following are deducted: Amount deductible under Sections 80CCC to 80U (excluding Section 80G), exempt income under Section 10 of the Act, short-term capital gains (111A), long-term capital gains Section (Section 112, 112A), and income referred under Sections 115A, 115AB, 115AC, 115AD, that pertain to non-residents and foreign companies.
Ans. Taxpayers who want to claim a deduction under Section 80G must have these documents: the donation receipt and Form 58A.
Ans. Anyone can claim a deduction under section 80G, including an individual, HUF, Company, etc. Even non-residents are eligible to claim a deduction under the section. However, the only condition that makes anyone eligible to claim the deduction is that they must have donated specified funds and institutions only.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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