An accounting measure employed by the IRS to help determine tax a wage earner’s liability. AGI = earned income + investment income (Portfolio income) + capital gains + net passive income. Once the adjusted gross income is determined, the wage earner may take deductions from this to calculate their tax liability.
Applying "Adjusted Gross Income" to Securities Exams:
In the U.S the income tax code provides for a progressive tax on earned income. As the amount of income earned by a person increases the rate at which the income is taxed also increases. The IRS allows taxpayers to take a variety of deductions against their adjusted gross income. Items such as contributions to a traditional IRA and home mortgage interest tax deductions are just two of the deductions that may be taken. A taxpayer with a net capital loss may carry the loss forward indefinitely and may use that loss to offset future capital gains. Net capital losses can be deducted against earned income at a standard rate of $3,000 per year.