Adjusted Gross Income, Explained in Four Minutes | WSJ

The Wall Street Journal
31 Mar 202304:23
EducationalLearning
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TLDRThe video script focuses on the importance of understanding one's Adjusted Gross Income (AGI) when filing taxes. AGI serves as the starting point for tax returns and is calculated by subtracting adjustments to income from gross income, which includes wages, dividends, capital gains, and other sources. Adjustments, often referred to as 'above the line' deductions, can include student loan interest, retirement contributions, and certain professional expenses. The script illustrates with an example of Olivia, who after making adjustments to her income, finds her AGI to be a crucial factor in determining her eligibility for tax credits. The AGI is pivotal as it sets the parameters for various tax breaks, ensuring they are accessible to lower and middle-income individuals. Although Olivia doesn't qualify for tax breaks based on AGI, understanding her AGI helps her assess her tax credits and deductions, ultimately determining her tax bill. The video emphasizes the significance of AGI in one's financial life, whether managing taxes personally or with professional assistance.

Takeaways
  • 💼 **Adjusted Gross Income (AGI) Importance**: AGI is the starting point for your tax return and is used by the IRS to determine your taxable income.
  • 📊 **AGI Calculation**: AGI is calculated by subtracting adjustments to income from your gross income, which includes wages, dividends, capital gains, and business profits.
  • 📉 **Adjustments to Income**: Adjustments can include student loan interest, retirement account contributions, and certain professional expenses, often referred to as 'above the line' deductions.
  • 🏠 **Example Scenario**: The script provides an example of Olivia, who calculates her AGI after accounting for her 401K contributions, health insurance premiums, rental income, and short-term capital gains from stock sales.
  • 💡 **AGI and Tax Credits**: AGI is essential for determining eligibility for various tax credits, such as the saver's credit and the earned income credit.
  • 👨‍👩‍👧‍👦 **Tax Credit Impact**: The earned income tax credit benefits millions of eligible workers and families, providing significant savings.
  • 📚 **Education-Related Credits**: There are tax credits available for students and parents, like the American Opportunity Tax Credit and Child Tax Credit, which may be linked to AGI.
  • 🚫 **Non-Eligibility**: In Olivia's case, she does not qualify for tax breaks based on AGI this year.
  • 🧮 **Deductions and Tax Bill**: After calculating tax credits, you can determine your actual tax bill by taking deductions into account.
  • 📝 **Understanding the Tax Code**: A deeper understanding of the tax code and how it relates to AGI can help you better comprehend your tax situation.
  • 🤔 **Professional Assistance**: While hiring an accountant or using tax services may simplify the process, knowing your AGI is still crucial for making informed financial decisions.
Q & A

  • What is the adjusted gross income (AGI)?

    -Adjusted gross income (AGI) is the starting point for your tax return and is a common measure of income used by the IRS and the government to determine how much money you've made over the past year. It is calculated as your gross income minus adjustments to income.

  • What are the components of gross income?

    -Gross income is a combination of your wages, stock dividends, capital gains, and any other income you might have, such as business profits.

  • What are adjustments to income and why are they important?

    -Adjustments to income include items like interest on student loan payments, contributions to some retirement accounts, and certain expenses like those a teacher might have. They are important because they are subtracted from your gross income to calculate your AGI, which can impact your tax liability.

  • How does Olivia's example illustrate the calculation of AGI?

    -Olivia's example shows that after subtracting her 401K contributions, health insurance premiums, and student loan interest from her gross income, which includes her wages, rental income, and short-term capital gains from stock sales, her AGI is reduced to $61,500.

  • Why is knowing your AGI important for tax purposes?

    -Knowing your AGI is important because it is used to determine your eligibility for various tax credits and to calculate your actual tax bill. It is a key factor in understanding how the tax code affects your financial situation.

  • What are some examples of tax credits that are tied to AGI?

    -Examples of tax credits tied to AGI include the saver's credit for retirement contributions, the earned income credit for low and middle-income families, the American Opportunity Tax Credit for students, and the Child Tax Credit for parents.

  • How does the earned income tax credit benefit eligible workers and families?

    -The earned income tax credit is the government's main program for assisting low and middle-income families. Last year, it benefited 31 million eligible workers and families, with an average savings of more than $2,000.

  • What is the significance of the term 'above the line deductions'?

    -Above the line deductions refer to adjustments to income that are subtracted from your gross income before calculating your AGI. These include certain expenses and contributions that are allowed by the IRS to reduce your taxable income.

  • Why might someone with other sources of income need to add those to their gross income?

    -Other sources of income, such as from freelancing or side hustles, need to be added to your gross income because they are also subject to taxation. This ensures a complete and accurate calculation of your total income for tax purposes.

  • How does the AGI impact the tax bill after tax credits are calculated?

    -After calculating your tax credits, your AGI is used to determine the amount of your deductions, which in turn affects your taxable income and ultimately your tax bill. The more deductions you can claim, the lower your taxable income and potentially your tax bill.

  • What is the role of an accountant or tax service in calculating AGI and saving on taxes?

    -An accountant or tax service can help you calculate your AGI accurately and identify all possible deductions and tax credits you may be eligible for. They can provide professional advice on tax-saving strategies based on your specific financial situation.

  • Why is it said that AGI plays a key role in your financial life, even if you use tax services?

    -AGI is a fundamental figure in your tax return and affects your eligibility for tax credits and deductions. Regardless of whether you prepare your taxes yourself or with the help of a professional, understanding your AGI helps you make informed decisions about your finances and tax planning.

Outlines
00:00
💼 Understanding AGI for Tax Savings

The video script begins by emphasizing the importance of knowing your Adjusted Gross Income (AGI) when filing taxes to save as much money as possible. AGI is the starting point of your tax return and is used by the IRS and the government to determine your income over the past year. The script explains how to calculate AGI by subtracting adjustments to income from your gross income, which includes wages, stock dividends, capital gains, and other income sources. Adjustments can include student loan interest, retirement account contributions, and certain professional expenses. The video uses the example of Olivia, a chemist with various income sources, to illustrate how AGI is calculated and its significance in determining tax credits and deductions, ultimately affecting one's tax bill.

Mindmap
Keywords
💡Adjusted Gross Income (AGI)
Adjusted Gross Income (AGI) is a key financial metric used by the IRS and the government to determine an individual's income over the past year. It is calculated by subtracting adjustments to income from the gross income. AGI serves as the starting point for tax return calculations and is crucial for determining eligibility for various tax credits and deductions. In the video, Olivia's AGI is used as an example to illustrate how it is computed and its importance in the tax filing process.
💡Gross Income
Gross income refers to the total earnings of an individual, which includes wages, stock dividends, capital gains, and other forms of income such as business profits. It is a foundational component in calculating AGI and is used to assess an individual's overall financial health before adjustments are made. In the script, Olivia's gross income is detailed, highlighting how different sources of income contribute to this total.
💡Adjustments to Income
Adjustments to income are deductions that can be subtracted from an individual's gross income to arrive at their AGI. These may include interest on student loan payments, contributions to retirement accounts, and certain professional expenses like those for teachers. The term 'above the line deductions' is used in the video to describe these adjustments, emphasizing their role in reducing taxable income. Olivia's example includes a deduction for student loan interest, which impacts her AGI calculation.
💡Tax Credits
Tax credits are reductions in the amount of tax owed, which can be claimed by taxpayers based on certain qualifications. They are used by Congress to provide financial relief and incentives to specific groups, such as low and middle-income families. The video explains that AGI is used to set the parameters for various tax credits, ensuring that they are accessible to those in need. Examples given include the saver's credit and the earned income credit.
💡Tax Deductions
Tax deductions are amounts that can be subtracted from an individual's taxable income, thereby reducing the total tax liability. The video emphasizes the importance of understanding tax deductions in relation to AGI, as they can significantly impact the final tax bill. Deductions are taken into account after calculating tax credits, and the video suggests that a deeper understanding of the tax code can help individuals navigate their tax obligations more effectively.
💡Tax Bill
A tax bill represents the final amount of money an individual owes to the government in taxes after all deductions and credits have been applied. The calculation of the tax bill is contingent upon understanding the tax code and how it interacts with AGI, deductions, and credits. The video suggests that a clear grasp of these components can simplify the process of determining one's tax bill.
💡Short Term Capital Gain
A short term capital gain refers to the profit made from the sale of an investment, such as stocks, that the investor held for one year or less. In the context of the video, Olivia's profit from selling stocks is considered a short term capital gain and is taxed at the ordinary income rate. This is an important consideration when calculating AGI and the subsequent tax liability.
💡Ordinary Income Rate
The ordinary income rate is the tax rate applied to an individual's taxable income, which includes wages, salaries, and other forms of earned income. In the video, it is mentioned in relation to short term capital gains, which are taxed at this rate. Understanding the ordinary income rate is essential for calculating the tax implications of various income sources.
💡Eligible Workers and Families
Eligible workers and families are those who qualify for certain tax benefits, such as the earned income tax credit. The video highlights that millions of these individuals and families benefit from such credits, which can result in significant savings. The term underscores the importance of understanding one's eligibility for tax relief programs based on AGI.
💡American Opportunity Tax Credit
The American Opportunity Tax Credit is a tax credit available for students and their parents to help offset the costs of higher education. The video mentions this credit as one of the tax breaks that may be tied to AGI, emphasizing the role of AGI in determining eligibility for various tax benefits.
💡Child Tax Credit
The Child Tax Credit is a tax credit designed to provide financial support to families with children. The video notes that eligibility for this credit, like other tax credits, is often linked to AGI, which serves as a measure to ensure that the benefits reach those within specific income brackets.
Highlights

Adjusted Gross Income (AGI) is a crucial number for determining how much money you've made over the past year and is used by the IRS to calculate your taxes.

AGI is calculated by subtracting adjustments to income from your gross income.

Gross income includes wages, stock dividends, capital gains, and other income sources like business profits.

Adjustments, also known as 'above the line' deductions, can include student loan interest, retirement account contributions, and certain professional expenses.

Calculating AGI is essential for determining your eligibility for various tax credits and deductions.

Olivia's example demonstrates how to calculate AGI by subtracting 401K contributions, health insurance premiums, and other adjustments from her gross income.

Olivia's taxable wage after adjustments is $57,000, including rental income and short-term capital gains from stock sales.

AGI is used to check for tax credits you may qualify for, such as the saver's credit and the earned income credit.

The earned income tax credit benefits low and middle-income families, with an average savings of over $2,000.

Other tax credits tied to AGI include the American Opportunity Tax Credit and Child Tax Credit for students and parents.

Understanding AGI helps you comprehend the tax code and how it affects your financial situation.

While an accountant or tax service can assist with AGI calculations, knowing your AGI is vital for managing your taxes.

AGI is a key figure on your tax return, playing a significant role in determining your tax bill.

Olivia's AGI example shows how private student loan interest payments can be subtracted from gross income to lower AGI.

AGI is a common measure used by the government to distribute tax breaks to ensure they benefit lower and middle-income individuals.

Tax credits and deductions are determined after calculating AGI, which directly impacts your actual tax bill.

Knowing your AGI is important even if you use tax services, as it is a central figure in your financial life.

Transcripts

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