A single taxpayer, age 50, had a gross income of $100,000. They contributed $7,500 to their Traditional IRA, are not covered by a workplace retirement plan, and have no other adjustments. They also paid $2,000 in student loan interest. What is their Adjusted Gross Income (AGI)?
- A$90,500
- B$92,500
- C$98,000
- D$88,500
Show answer & explanationAnswer & explanation
Correct answer: A. $90,500
Adjusted Gross Income (AGI) is calculated by subtracting 'above-the-line' deductions from gross income. For 2023, the maximum Traditional IRA contribution for someone age 50 is $7,500 ($6,500 regular + $1,000 catch-up). Since they are not covered by a workplace plan, the full $7,500 is deductible. The maximum student loan interest deduction is $2,500, but they only paid $2,000, so $2,000 is deductible. Total deductions from gross income = $7,500 (IRA) + $2,000 (student loan interest) = $9,500. AGI = $100,000 (gross income) - $9,500 (total deductions) = $90,500.
Why the other options are wrong
- B. This option incorrectly calculates the AGI by either miscalculating the deductions or including an incorrect deduction.
- C. This option incorrectly assumes only the IRA contribution is deductible, missing the student loan interest deduction.
- D. This option incorrectly calculates the AGI by either miscalculating the deductions or including an incorrect deduction.
Adjusted Gross Income (AGI)
AGI is an intermediate calculation in federal income tax, representing gross income minus specific 'above-the-line' deductions. It's a critical figure influencing eligibility for many tax benefits and limitations.
- Calculated before standard or itemized deductions.
- Often used to determine eligibility for credits, deductions, and phase-outs.
- Includes deductions like IRA contributions, student loan interest, HSA contributions, and educator expenses.
Memory trick: AGI is your 'Gross Income' adjusted for 'Above-the-Line' deductions.