Tax Prep & Planning

What is AGI? And How Can You Reduce It By Years’ End?

It’s the holiday season… While your mind might be on buying presents and enjoying festive events, you may want to consider adding something else to your to-do list: finding an answer to what is AGI? and discovering ways to reduce it.

Even this late in the year, it’s not too late to lower your tax bill for the upcoming tax season. In fact, there are several actions you can take in a relatively short amount of time and improve your tax situation, many of which involve looking into eligibility for additional tax deductions.

Here is a little more information about AGI, and why it’s important to consider reducing it before Dec. 31, 2017:

What is AGI & What Does It Have To Do With Taxes?

Gross income is the total of everything an individual earns in a year. Adjusted Gross Income, or AGI is your gross income less “above-the-line” deductions. AGI affects other items on your tax return, including eligibility for and the size of some deductions and credits, how much of your social security is taxable, and much more. Ultimately, it is a component of your taxable income.

What Is The Difference Between Taxable Income and AGI?

As explained above, your gross income includes amounts from your W-2 and other information documents that you must report on your tax return. It also includes income from other sources, like rental profits, unemployment income, taxable Social Security payments, pensions, and side jobs. AGI is gross income less above-the-line deductions.

Your taxable income is your AGI minus tax deductions and exemptions.

After calculating AGI, you can claim the standard deduction and personal exemptions to reach taxable income. Or, if eligible, you can itemize deductions instead if total itemized deductions are more than the standard deduction. When working on individual taxes, then, the AGI is an important but intermediate step in determining how much of one’s income is taxable.

How Can You Reduce Your AGI?

Some deductions you may be eligible for to reduce your adjusted gross income include:

  • Alimony
  • Educator expense deduction
  • Health savings account contributions
  • Retirement plan contributions, like IRA or self-employed retirement plan contributions
  • For the self-employed, health insurance and one half of S/E tax
  • Moving expenses
  • Student loan interest

Each of these deductions has eligibility qualifications and limitations.

Where Do You Find Your AGI on Tax Forms?

When you e-file a tax return, you must provide your prior-year AGI to verify your identity to the IRS. It is a new identifier that replaced using a customized pin. Depending on which form you filed last year, look for your AGI on previous-year tax forms in the following areas:

  • Line 37 of Form 1040
  • Line 21 of Form 1040A
  • Line 4 of Form 1040EZ or
  • Line 36 of Form 1040NR

Going forward, when figuring out your AGI, start by adding up your reported income from financial statements. From this total of earnings, deduct all of your allowable above-the-line items to reach your AGI. Remember: IRS requirements for taking a tax deduction are specific, so it’s always helpful to visit IRS.gov for more information or consult an expert tax advisor to help you out.

Hopefully this post answered the question “What is AGI?” in full detail. Remember: by taking advantage of one – or more – of these tax strategies before the end of the year, you can help put yourself in a favorable position come tax time.

Again, if you need any additional help, you can always consult with one of our advisors, too. Find an office near you now.

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