Adjusted Gross Income (AGI) is gross income(e.g. Wages, interest, dividends, capital gains, IRA distributions etc.) minus adjustments(e.g. IRA deduction, HSA deduction, Student loan deduction etc.) to income. AGI is a crucial figure that affects tax calculations. The exemption and itemized deduction, that reduce taxable income, are based on AGI figure. Same with the tax credits(e.g. Child tax credit ) that reduce directly the income tax. The exemption, itemized deduction and tax credits are reduced or not allowed if AGI exceeds certain limit. Here are few illustrations of AGI impact on personal exemption, itemized deduction and child tax credit.
For 2016, single tax filing status, the full exemption amount $4050 is allowed for AGI upto $259400, thereafter exemption amount is reduced with increasing AGI and is reduced to zero exemption for AGI $381900 or above.
Let us assume a single tax filer paid $50000 for mortgage interest and property tax in 2016. And assume that the tax filer has only mortgage interest and property tax to itemize. As you can see, full itemized deduction of $50000 is allowed only if AGI is upto $259400. The itemized deduction is started to decrease for AGI above $259400. And for AGI $900000, only $30000 can be claimed as itemized deduction.
For 2016, single tax filing status, child tax credit $1000 is allowed if AGI is $75000 or below. For AGI above $7500, child tax credit is started to decrease and become zero for AGI $9500 or above.