Form W2 provides employees with the total income they earned during the tax year. It’s enough to start calculating AGI (adjusted gross income) and figuring out the taxable portion of your income.
You can start with your W2 as it shows the income you earned during the course of the tax year. However, if you earned income outside of employment, you first need to calculate your total reported income. We suggest waiting until February 14th if you are expecting tax documents that report your income.—then, calculate your adjusted gross income.
Before we get to calculate your adjusted gross income, let us explain what it is. Adjusted gross income is the amount you are taxed after subtracting deductions and adjustments to your gross income. The income you see on your Form W2 is the gross income. You aren’t going to be taxed based on this amount. Instead, you must do the math to determine AGI.
Once your employer furnishes you with Form W2, you will see your gross income on Line 1 stated as wages, tips, other compensation. The next step is to figure out AGI by subtracting the deductions and adjustments that are available to you.
Subtract Tax Deductions From Gross Income
Before you make any adjustments to your income, make sure to subtract the deductions that are available to you. Most taxpayers take the standard deduction which has a value of $12,400 for single filers and double that amount for joint filers at the time of writing.
Once that is done, you cannot claim any other deductions. So if you take the standard deduction, itemizing deductions isn’t an option.
Before you decide on which route to go, we suggest figuring out the total itemized deduction amount. If your itemized deductions are more than the standard deduction, itemize. If not, take the standard deduction. If you have mortgage payments, unreimbursed medical expenses, property tax payments, and state income tax payments, you surely can exceed the standard deduction.
The only thing left to do is to subtracting the deduction amount from your gross income.
Subtract Adjustments (Above-the-line Deductions)
You can make adjustments to your income for your qualifying expenses. Some of these above-the-line deductions are for educator expenses, student loan interest paid, HSA contributions, alimony payments, and deductible portion of self-employment tax.
Calculate the total amount you can claim using Schedule 1 and subtract it from where you were left off. This is how you calculate AGI. It is simple but you must be very careful with what you can and cannot claim in deductions and adjustments. Here is an example.