An adjusted gross income calculation determines taxable income by subtracting specific deductions from total income. For instance, if an individual earns $100,000 in wages and deducts $12,000 for contributions to a retirement plan, their adjusted gross income would be $88,000.
Understanding this calculation is crucial for accurate tax filing and maximizing potential refunds. Historically, the concept originated in the Revenue Act of 1943 and has undergone various refinements over time.