How is Adjusted Gross Income (AGI) calculated?

Adjusted Gross Income (AGI) is calculated by subtracting specific deductions from total gross income. This process takes into account various allowable deductions such as contributions to retirement accounts, interest on student loans, and tuition expenses, among others.

The purpose of calculating AGI is to determine an individual’s taxable income, which ultimately affects their tax liability. By accounting for these deductions, taxpayers can obtain a more accurate measure of their income that reflects their financial situation. This is critical because AGI is used as a threshold for determining eligibility for various tax credits and deductions, influencing overall tax obligations.

The other methods mentioned in the alternative choices do not accurately describe the process for calculating AGI. Simply adding all sources of income does not consider deductions that can lower the taxable income. Multiplying total income by a fixed rate and averaging income over several years do not pertain to AGI calculations and are not methods used in tax computations.