What defines adjusted gross income (AGI)?

Adjusted gross income (AGI) is defined as total income reduced by certain amounts. This concept is fundamental in income tax calculations for individuals. AGI serves as a starting point for determining how much of your income is subject to tax. It is calculated by taking all sources of income—including wages, dividends, capital gains, and other earnings—and then subtracting allowable adjustments. These adjustments can include contributions to retirement accounts, student loan interest, tuition fees, and certain business expenses.

Understanding AGI is crucial because it influences eligibility for various tax credits and deductions. For example, many tax benefits phase out at higher levels of AGI, making it a significant figure in tax preparation.

The other options do not accurately capture the definition of AGI. Total income minus deductions for children incorrectly implies that only specific family-related deductions are considered, rather than the broader range of adjustments. Total income from all sources fails to account for the necessary reductions that transform total income into AGI. Finally, taxable income after exemptions denotes the final amount on which tax is calculated, which comes after AGI has been determined. Therefore, option B—total income reduced by certain amounts—provides the correct and complete definition of adjusted gross income.