Certified Financial Management Specialist Practice Exam

What does Adjusted Gross Income (AGI) represent?

1. Total income before deductions

2. Total taxable income minus eligible deductions

3. Net profit for a business

4. Gross income after taxes

The correct answer is: Total taxable income minus eligible deductions

Adjusted Gross Income (AGI) represents total taxable income minus eligible deductions, which is why the chosen answer is correct. AGI is a critical figure on your tax return as it serves as the basis for determining your taxable income. It includes various forms of income such as wages, dividends, capital gains, and retirement distributions, but it is adjusted by subtracting specific deductions such as contributions to retirement accounts, student loan interest, and tuition and fees. Understanding AGI is essential because it affects eligibility for many tax credits and deductions. Certain tax benefits phase out at specific AGI thresholds, making it important for tax planning. By accurately determining AGI, taxpayers can better assess their overall tax liability and explore options for reducing it. The other options do not accurately describe AGI. The first option focuses only on total income before deductions without recognizing the adjustments made. The third option refers specifically to net profit for a business, which is a different financial metric altogether. The fourth option implies a calculation involving taxes, which is not how AGI is defined, as it is calculated before tax liabilities are applied.