Adjusted Gross Income (AGI) Explained Step by Step

Adjusted Gross Income (AGI) is your total gross income minus specific adjustments allowed by the IRS. Gross income includes wages, dividends, capital gains, business income, and other earnings. Adjustments, often referred to as "above-the-line deductions," can include contributions to retirement accounts, student loan interest, and certain business expenses.

How to Calculate Adjusted Gross Income (AGI)

To determine your AGI, follow these steps:

1. Determine Your Total Gross Income: Combine all income sources, such as salaries, rental income, dividends, and business earnings.
2. Identify Applicable Adjustments: Common adjustments include educator expenses, student loan interest, contributions to traditional IRAs, and health savings account contributions.
3. Subtract Adjustments from Gross Income: Deduct the total adjustments from your gross income to arrive at your AGI.

Why Adjusted Gross Income (AGI) Matters for Taxpayers

AGI affects:

• Tax Brackets: the brackets apply to taxable income, not AGI. Subtract the standard or itemized deduction, any QBI deduction, and the newer deductions §63(b) now allows, and you reach the figure the rates actually run against. For 2025 through 2028 those include the senior deduction of up to $6,000 per qualifying person and the deductions for qualified tips, overtime and car-loan interest. From 2026, people who take the standard deduction can also deduct up to $1,000 of cash gifts to charity ($2,000 on a joint return).
• Credits and Deductions: Most phase-outs are written against modified AGI, which starts at AGI and adds certain items back. The Child Tax Credit is one of them. The add-backs differ from rule to rule, so one taxpayer can have several MAGI figures in the same year.
• Investment Taxes: Long-term capital gains rates run against taxable income, on the same figure as the ordinary brackets. What AGI drives is the 3.8% net investment income tax, which applies above $200,000 of modified AGI for a single filer and $250,000 on a joint return (§1411).

Adjusted Gross Income (AGI) and Tax Deductions

You itemize only when your itemized deductions add up to more than the standard deduction. AGI sets the size of some of those deductions, such as the 7.5%-of-AGI floor on medical expenses. The 2026 standard deduction is:

• Single filers or Married filing separately: $16,100
• Married filing jointly or Qualifying Surviving Spouse: $32,200
• Heads of household: $24,150

Adjusted Gross Income (AGI) for Business Owners and Investors

Real Estate Investments

Real estate investors report rental income as part of their gross income. However, they can lower their AGI through deductions like mortgage interest, property taxes, operating expenses, and depreciation. The IRS allows residential rental property depreciation over 27.5 years, significantly reducing taxable income (IRS, 2025).

For strategies on maximizing tax benefits in real estate, see our tax solutions page.

Private Equity Funds

Partners in private equity funds must report their share of income and expenses. In a fund that invests rather than trades, an investor’s share of management fees and fund expenses is a miscellaneous itemized deduction. §67(h) (formerly §67(g)) has disallowed those since 2018, and the 2025 tax law made that permanent, so they do not lower AGI. Carried interest arrives as capital gain and enters AGI like any other capital gain. What changes is the holding period: under §1061 an applicable partnership interest needs three years rather than one for long-term treatment, and a shorter hold is recharacterized as short-term.

Technology Companies (SaaS)

SaaS businesses include subscription revenue in gross income but can lower AGI by deducting R&D costs, salaries, and marketing expenses. The five-year amortization that applied from 2022 through 2024 is gone: OBBBA added §174A, and domestic research is deductible in the year it is paid or incurred for tax years beginning after December 31, 2024. Research attributable to foreign work stays on a 15-year amortization (Rev. Proc. 2025-28). A company can still elect to amortize the domestic side under §174A(c), but the default is now the immediate deduction.

Our financial forecasting work covers how these deductions land in a SaaS model.

Hospitality & Short-Term Rentals

Hotel operators and Airbnb hosts must report rental income but can deduct operating costs, employee wages, property taxes, and depreciation to reduce AGI. IRS guidelines allow property depreciation over its useful life, easing tax burdens (IRS, 2025).

Ways to Lower Adjusted Gross Income (AGI)

1. Max Out Retirement Contributions: traditional 401(k) and deductible IRA contributions come off before AGI, so they move the figure the phase-outs are measured against.
2. Invest in a Health Savings Account (HSA): HSA contributions are tax-deductible.
3. Claim Business Deductions: Self-employed professionals can write off expenses like office space and travel.
4. Use Tax-Loss Harvesting: realized losses offset realized gains, and up to $3,000 of net loss a year comes off ordinary income, both above the AGI line.

Parikh Financial: Expert Guidance for Lowering Your AGI

At Parikh Financial, we specialize in tax planning for real estate investors, SaaS founders, private equity funds, and cryptocurrency traders.

Some AGI moves, such as timing a stock sale or a large depreciation year, only count if they happen inside the tax year. Our tax planning work runs them against your actual income, and we prepare the return that reports them. Book a call before year end with your income so far this year.