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AGI, that is, adjusted gross income is defined by section 62 of the Internal Revenue Code as gross income from all sources. AGI is creator of tax code and therefore its components change over time as the tax law changes.  AGI however can be understood in part if compared with other measures of income.  When it is compared with a measure of comprehensive income, AGI is basically a measure of money income, although it does not comprise many forms of money income which would be part of full income. When looked at the economy point of view, AGI is comparable with personal income in the National Income and Product Accounts (NIPA) although thre occurs a difference mainly just as it is with the comprehensive income the income AGI is the widest  measure of income but if looked on the basis of income tax system, if compared with the measure of income to which tax rates are actually useful, it does not replicate individual differences that influence person’s ability to pay taxes.

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AGI has many different components but wages and salaries were the major sources of income in 1994.Taxable interest and dividends, profit from partnerships, Subchapter S corporations, sole traders, and big farms, investment gains, payable pension and Individual Retirement Account (IRA) distributions, joblessness reparation and some Social Security benefits are also components of AGI. The deductions  used in reaching AGI incorporated trade and business everyday expenditure, expenses attributable to rents and royalties, and certain losses from the sale or exchange of property.

The Form 1040 is where persons work out their income tax. This refers to other deductions acceptable in reaching AGI as income adjustments or as statutory adjustments.in the year 1994, these adjustments incorporated mostly maintenance payments, travelling  expenses, certain savings for retirement for example contributions to Keogh plans for the self-employed and to IRAs for employees and their spouses, one-half of the self-employment tax, and a health insurance deduction for the self-employed.

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However the definition of AGI has changed due to tax law amendments in the past 15 years. The biggest of all came in the Tax reform Act of 1986 where full inclusion of long-term capital gains where  40% was included in the AGI but before 1979, 50% was already included. This act also gave limits on passive losses which would be allowed in the calculation of AGI.it changed moving expenses and unreimbursed employee business expenses from income adjustments to itemized deductions, however from 1994, travelling expenses were again incorporated  as an adjustment rather than an itemized deduction. It also allowed self employed persons a deduction of 2.5%of their health insurance premiums. Legislation has also made its changes , it added the adjustment to income for one-half of individuals self employment tax. In 1984 social security benefits were for the first time included in the AGI for tax payers with other income of $25000 and %32000 for married couples.AGI can be compared conceptually and  quantitatively to other frequently used measures of income. (Pechman, 1987)

A different type of income is Comprehensive income, income as consumption plus changes in net worth, is wide  than the AGI. AGI does not include most forms of income tha does not use money  together with some  types of money income.  The components of comprehensive income which are not in AGI comprise imputed rent on owner-occupied accommodation, unrealized investment gains, and in-kind fringe profit of people. If these incomes were to be included for tax purposes  one would involve considerable assessment problems. Sources of monetary income which are not  in AGI include welfare payments, interest on state and local government bonds, employer-provided contributions for health and pension plans, and income on savings through life insurance. The above forms  of income are excluded mostly  for policy than for administration reasons.

Personal income in the NIPA is another broader line of income, on balance, than AGI.  Personal income amounted to $6.2 trillion in 1992, compared with $4.2 trillion of AGI but AGI includes $0.8 trillion in sources of income that are absent from personal income. The largest of these is personal contributions to Social Security and related programs followed by taxable personal pensions and net capital gains.Personal income includes the following major items that are not in AGI: transfer payments , employer-provided fringe benefits , investment income of life insurance or private pension funds ,and differences in accounting treatment between NIPA and tax regulations .In addition, there is gap between AGI as reported to the Internal Revenue Service and AGI. Much of the gap represents noncompliance with the tax code.

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For tax purposes, AGI represents a wide calculate of net income; on the other hand, in most compliments it does not reflect differences in individual situation that the public wants to take into account before levying taxes. These differences include family size, marital circumstances, or mainly large expenditures for purposes that the public either wants to encourage or views as suitable adjustments to a measure of ability to pay. (Park, (August 1994))

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