When you are an employee, a W-2 form documents your earnings from the job. It's the starting point for calculating adjusted gross income The IRS defines AGI as total or gross income adjusted by subtracting certain amounts. AGI is used on tax returns as a step in computing your tax liability. AGI also determines eligibility for certain tax credits, deductions and the amounts you may contribute to IRAs and other qualified savings plans. You can even use AGI as identification to electronically verify and file your tax return.
Determine Gross Income
You must find your gross income to calculate AGI. Look in box 1 of your W-2 form for total wages, tips and other compensation. To that figure, add any taxable interest and dividends paid on stocks you own plus capital gains, which are profits from the sale of assets like stocks, real estate or other investments. Subtract any capital losses from the sale of assets. Include earnings from a business, S corporation or partnership plus alimony, royalties you may have received -- for example, from book or music sales -- any unemployment benefits and farm or rental income. You also add the taxable portion of retirement income from pensions and other retirement savings plans, and annuities. All of these forms of retirement income may be partially tax-exempt if you contribute to the plans before retirement. If part of your Social Security benefits are taxable, include this amount as well.
Make Necessary Adjustments
Adjust gross income by subtracting tax deductible contributions to individual retirement accounts and other qualified retirement savings plans. Also subtract student loan interest, alimony paid, moving expenses and penalties for early withdrawals from savings accounts. Finally, subtract 50 percent of self-employment taxes paid, if any. The result is your adjusted gross income.