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Basics of Adjusted Gross Income for Accountants

Much more so than other industries, the accounting sector is overflowing with jargon. To the average English-speaking person, the U.S. tax code reads like another language. This jargon is why, as a tax professional, you must help translate these concepts for your clients. Accounting MBA programs teach students to help clients navigate confusing jargon, such as adjusted gross income (AGI). For a non-CPA, it's easy to assume that this is just a person's annual income. However, it's a little bit more nuanced than that.

What Is Adjusted Gross Income?

Bench defines AGI as all the money a person earned over the last year minus several key adjustments to this income. After these adjustments occur, AGI serves as the starting point for filing federal and state taxes.

You can calculate AGI by adding up all the money you've earned for the year. This total includes all sources of income such as wages, interest/dividend income, taxable retirement income, and capital gains. From there, you subtract any eligible adjustments. The result is your AGI.

AGI is not to be confused with other classifications of income, such as your gross total income (GTI).

AGI vs. GTI

As an accountant, you must pay attention to the details. For example, confusing two classifications of income, such as "adjusted gross income" and "gross total income," might seem like an innocent mistake. But, this mixup could drastically impact a client's tax return.

Corporate Finance Institute defines GTI as the total income earned by an individual on their paycheck before taxes and other deductions. This total includes wages, rental income, dividends, and other types of income. Notably, GTI does not include any income adjustments. This makes it very different from your AGI.

If you accidentally used a client's GTI for their tax filing, they would likely end up with a significantly higher tax bill than they should have. Additionally, if you are filing a return on behalf of a business, there are even more discrepancies.

For a business, gross profit is the revenue a company earned from selling its goods or services after subtracting the direct costs incurred in producing the goods sold. This total includes costs such as labor, raw materials, equipment, or shipping. Again, as a tax professional, it is your responsibility to know how, when, and where to classify these different costs. Doing this consistently will help your clients reap the benefits of lowering their tax burden.

Benefits of Lowering Your AGI

As you might imagine, reducing your AGI has plenty of benefits. The biggest reward is that reducing your AGI will give you a lower taxable income. The lower your AGI, the lower your tax bill will be.

Other benefits of lowering your AGI include receiving more social security benefits and increasing your allowable higher education tax credits.

The list of adjustments you can make to your income is in constant flux. This inconsistency is just one reason why it's so important to stay up-to-date with the tax code. Allowable income adjustments include IRA contributions/distributions, pensions, social security, alimony payments, health savings account contributions, work-related moving expenses, and student loan interest payments.

You can see how it's essential to have a detailed understanding of how AGI works. This way, you can take full advantage of adjustments for your clients.

You can find the list of eligible adjustments on Schedule 1 of Form 1040.

Staying Up-To-Date With the Tax Code

As an accounting professional, you essentially act as a liaison between your client and the U.S. federal government's rules. When changes occur, you will be responsible for learning them and translating them for your clients. Of course, becoming a liaison is the final step. Before you can fulfill this role, you will need to pass your CPA exam. Before you can pass your CPA exam, it's beneficial to earn a Master of Business Administration (MBA) with a focus on accounting.

Ideally, you should enroll in a program where the coursework is applied to help meet the 150-hour requirement to sit the Certified Public Accountant (CPA) Exam. Programs that offer this benefit allow you to double-spend your time. You can broaden your knowledge base in accounting while also fulfilling the mandated hour requirement to obtain your CPA certification.

One such program is Emporia State University's online MBA program, which has a specific concentration in accounting and prepares graduates to take the CPA Exam. The program will further your accounting career and enhance your corporate financial decision-making. It is AACSB-accredited, and students can complete it online in as few as 12 months.

Learn more about Emporia State University's online Master of Business Administration with Accounting Concentration program.


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