What is the method used to calculate adjusted gross income (AGI)?

Adjusted Gross Income (AGI) is calculated by taking the total gross income and subtracting specific deductions allowed under the tax code. These deductions can include contributions to retirement accounts, student loan interest, tuition and fees, and certain business expenses for self-employed individuals.

The purpose of calculating AGI is to determine the income level that will be used to establish eligibility for certain tax benefits and credits, as well as to determine the taxpayer's overall tax situation. It reflects a more accurate picture of an individual's income after accounting for specific expenses that the tax system recognizes as important for tax calculation. This adjusted figure is crucial because it influences the taxpayer's taxable income and plays a significant role in applying various deductions and credits on their tax return.

Other methods listed, such as simply adding all income sources or multiplying total income by a rate, don't adequately represent the process for determining AGI, as they overlook the critical role of allowable deductions in arriving at a more precise taxable income figure. Subtracting taxes owed also does not factor into the calculation of AGI, as that step occurs later in the tax process.