Pay Less in Taxes by Minimizing Adjusted Gross Income

Adjusted Gross Income Calculator by CNN

(I want to acknowledge that nearly all of the information in this post was taken from the CNN money site.)

This post may be the best cure for insomnia yet. It contains the definitions of gross income, adjusted gross income (AGI), and modified adjusted gross income (MAGI). While you probably won't want to talk about this at parties--your date will go to the ladies' room and never come back--understanding these concepts is vital if you want to reduce your taxes.

The secret to paying less in taxes is to get one's adjusted gross income (AGI) to be as low as possible.  This is important for a variety of reasons. Aside from the fact that you will be less in taxes if your AGI is lower, it is also the case that deductions for charitable contributions and medical expenses are phased out over a certain income level. Currently, this level is $132,000 for single taxpayers or married taxpayers filing jointly. That level is $66,000 for married taxpayers filing singly.

Adjusted Gross Income = Gross Income -- Certain Allowable Deductions

Gross income includes:

• Salary or other wages
• Tips
• Taxable Interest from Savings Accounts
• Taxable portions of pensions and annuities
• Capital Gains (capital losses may be subtracted)
• Stock Dividends
• Other: This is a broad category including alimony paid to you, royalties, pension and annuity payments, farm income, rental income, royalties, income from partnerships, and a few others.

To compute adjusted gross income, total all the income listed above and then subtract the following:

• Payments to IRAs, SEP Simple Plans, and other qualifying, tax-deferred retirement plans
• If you are self-employed and buying your own health insurance, you can deduct the premiums on tis part of your tax return.  If you are not self-employed and paying your own medical insurance, you can claim it as a deduction if you itemize your return.
• Student loan interest
• Moving expenses
• One-half of self-employment tax

Then, there is MAGI, modified adjusted gross income. This is used primarily for computing how much of your contribution to tax-deferred retirement funds is deductible. To calculate MAGI, calculate your adjusted gross income (AGI) and add foreign income, student loan deductions, foreign housing deductions, IRA contribution deductions, and a few other item. This link to Investopedia explains MAGI in a clear and succinct way.

A few points are obvious from reviewing the data.  The two easiest ways to reduce your AGI are:

1. Contribute to IRAs or other tax-deferred retirement plans.
2. Become self-employed because you can deduct your health insurance costs from your gross income, thus lowering your AGI and preserving eligibility for other tax deductions.

Perhaps I should add a disclaimer: Do not rely on me for tax advice.  I have spent most of my life as an algebra teacher.  Consult a tax professional.  What this blog can do for you, however, is raise points for you to consider.