Adjusted Gross Income (AGI) represents your total income minus certain IRS-approved adjustments, but before deductions.
AGI is not your gross income and not your final taxable income. Instead, it is an intermediate calculation the IRS uses to determine eligibility for tax benefits, reporting obligations, and phase-outs.
AGI is calculated in a two-step process that begins with gross income and ends with legally permitted adjustments.
First, you calculate gross income, which generally includes all taxable income from:
Next, you subtract specific adjustments allowed by the IRS. These are often referred to as adjustments or “above-the-line” deductions because they reduce income before deductions are considered.
The result of this calculation is your Adjusted Gross Income (AGI).
Important: Only adjustments explicitly permitted under U.S. tax law may be used. Personal expenses or deductions not listed by the IRS cannot be applied at this stage.
Common examples of adjustments include:
Expenses that do not appear on that list cannot be used for this purpose.
AGI and taxable income are closely related but serve different purposes in U.S. tax calculations.
| Adjusted Gross Income (AGI) | Taxable Income |
| Calculated after subtracting IRS-approved adjustments from gross income | Calculated after subtracting deductions from AGI |
| Used to determine eligibility for deductions, credits, and exclusions | Used to calculate the actual income tax owed |
| Appears earlier in the tax calculation process | Appears later, after deductions are applied |
| Acts as a reference point for phase-outs and filing thresholds | Acts as the base amount to which tax rates apply |
In practical terms, AGI determines what tax benefits you may qualify for, while taxable income determines how much tax you ultimately pay.
For Americans living in Israel, Adjusted Gross Income (AGI) is a key figure that affects many aspects of U.S. tax reporting – including eligibility for deductions, credits, and certain exclusions. While Israeli tax calculations are based on different income concepts, U.S. tax rules consistently rely on AGI as a starting point.
Understanding how AGI is calculated and how it differs from Israeli taxable income helps avoid confusion when filing both U.S. filings and Israeli returns. To learn more, please contact experienced U.S. tax accountants from Philip Stein and Associates at any time.