What is adjusted gross income?

Adjusted gross income (AGI) is total income minus specific adjustments, such as retirement contributions, health insurance premiums for self-employed individuals, and certain business expenses. It serves as the starting point for calculating taxable income. For professional service firm owners, understanding AGI is essential because many tax benefits and limitations are based on AGI thresholds.

Key characteristics

• Total income minus specific adjustments

• Starting point for taxable income calculation

• Affects eligibility for tax deductions and credits

• Different from gross income and taxable income

• Important for retirement contribution limits

• Basis for many tax planning strategies

Why it matters for professional service firms

Many tax benefits phase out at certain AGI levels. Understanding AGI helps professional service firm owners plan strategically, timing income and deductions to maximize benefits. Retirement contribution limits, deduction eligibility, and tax credit availability all depend on AGI. Strategic AGI management can significantly reduce tax liability.

Real-world example

Marcus, the owner of a consulting firm, had a $450K in gross income. AGI adjustments: self-employed health insurance $18K, SEP IRA contribution $55K, self-employment tax deduction $15K. AGI: $362K. This AGI level allowed certain deductions that would have been phased out at a higher AGI level. Tax planning for next year: timing of income recognition and maximizing adjustments to keep AGI below the threshold for additional benefits. Understanding AGI enabled strategic planning versus reactive tax preparation.