What is adjusted gross income?
To calculate your adjusted gross income, often referred to as your “AGI,” you begin by determining your gross income, which includes all income you received (wages, tips, interest, rent payments, etc.). Following Form 1040, you then deduct certain items, such as any IRA contributions or student loan interest, and the form will eventually give you your adjusted gross income.
This AGI is used in determining the limits to certain itemized deductions. For example, medical expenses are only deductible to the extent they are in excess of 7.5% of your AGI, personal casualty and theft losses are only deductible to the extent they are in excess of 10% of your AGI and miscellaneous deductions are only deductible to the extent they are in excess of 2% of your AGI.
Your AGI is also used to determine whether the 2% reduction applies.