| Most taxpayers concentrate on ways to reduce their | | | | this situation a $1,000 increase in AGI could increase |
| "taxable income". However, beginning with the Tax | | | | the tax liability by $278.00 - almost 28%.There are |
| Reform Act of 1986, your "Adjusted Gross Income", | | | | several moves you can make to reduce your AGI:* |
| or AGI, has become the most important number on | | | | Maximize "pre-tax" contributions to your 401(k), |
| your tax return.Many tax credits and deductions are | | | | 403(b) or other pension or deferred compensation |
| phased-out, or altogether eliminated, based on your | | | | plans, including any "catch-up" contributions for |
| AGI, or in some cases a "Modified" AGI (no gift from | | | | participants age 50 or older.* Maximize the amount of |
| this MAGI), and several items of income are | | | | wages set aside in an employer-sponsored "pre-tax" |
| increased and some deductible losses are reduced as | | | | medical expense or dependent care flexible spending |
| this number grows.The Tax Reform Act of 1986 | | | | account.* Postpone the receipt of a year-end bonus |
| started the ball rolling by limiting the allowable rental | | | | until next year.* Postpone billing clients until January, |
| loss deduction for taxpayers with an AGI in excess | | | | accelerate or prepay business expenses at year-end, |
| of $100,000 and phasing-out the amount of IRA | | | | and maximize contributions to a SEP, SIMPLE or |
| contributions that could be deducted based on an | | | | Keogh plan if you are self-employed.* Accelerate or |
| AGI threshold. The Budget Reconciliation Act of 1990, | | | | prepay expenses at year-end if you own rental |
| the Taxpayer Relief Act of 1997 and the many tax | | | | property.* Sell investments at a loss to take |
| Acts passed under George W all continued the trend | | | | advantage of the maximum $3,000 net capital loss |
| of limiting credits and deductions based on AGI.Items | | | | deduction.* Maximize deductible contributions to a |
| that are affected by your AGI (or MAGI) include:* | | | | traditional IRA, including catch-up contributions.* |
| the taxable portion of interest on US Savings Bonds | | | | Instead of deducting the total fee for tax |
| used to pay for education,* losses from rental real | | | | preparation as a "miscellaneous" deduction on |
| estate activities with active participation,* the taxable | | | | Schedule A, allocate a portion of the fee, if applicable, |
| portion of Social Security and Railroad Retirement | | | | to Schedule C and/or Schedule E.* Invest in tax-free |
| benefits,* deductible traditional and spousal IRA | | | | municipal bonds or tax-deferred US Savings Bonds |
| contributions,* the ability to contribute to a ROTH | | | | instead of bank CDs (remember that tax-exempt |
| IRA, and to convert a traditional IRA to a ROTH,* | | | | interest is included in the calculation of taxable Social |
| student loan interest,* the deduction for tuition and | | | | Security and Railroad Retirement benefits).Let us look |
| fees,* medical and dental expenses,* charitable | | | | at an example where reducing AGI by $1,000 could |
| contributions,* casualty and theft losses,* job | | | | result in $913 less federal tax - a 91.3% tax |
| expenses and most other "miscellaneous" | | | | savings!John and Jane Q. Taxpayer anticipate an AGI |
| deductions,* total Itemized Deductions,* the | | | | of $130,450 for 2005. They will be in the 25% tax |
| deduction for personal exemptions,* the dreaded | | | | bracket. John and Jane have three dependent |
| Alternative Minimum Tax (AMT),* the Credit for Child | | | | children, two under age 17 and one who is a college |
| and Dependent Care Expenses,* the Credit for the | | | | freshman. They paid $5,000 in college tuition and their |
| Elderly or Disabled,* the HOPE and Lifetime Learning | | | | miscellaneous deductions are more than 2% of their |
| education credits,* the Retirement Savings | | | | AGI.If J and J gave an additional $1,000 to charity |
| Contributions Credit,* the Child Tax Credit,* the | | | | before year-end they will save $250 in federal income |
| Adoption Credit,* the Earned Income Credit,* | | | | tax. If, instead, they can reduce their AGI by $1,000 |
| Coverdell Education Savings Account contributions, | | | | they will put an additional $913 in their pocket.By |
| and* the safe harbor amount for quarterly estimated | | | | reducing their AGI from $130,450 to $129,450 they |
| tax payments.Each of the items listed above has a | | | | will be able to deduct an additional $2,000 in tuition |
| separate set of AGI thresholds. For some items, such | | | | and fees as an "adjustment to income", which will |
| as the education credits and the deductions for | | | | further reduce their AGI. This brings their total AGI |
| student loan interest and tuition and fees, the | | | | reduction to $3,000. As a result they will be able to |
| amount for joint filers is twice that for unmarried | | | | deduct an additional $60 in miscellaneous deductions |
| taxpayers; for some it is not. For the reduction of | | | | on Schedule A. The taxable income on their 2005 |
| Itemized Deductions the threshold is the same | | | | Form 1040 is reduced by a total of $3,060, which will |
| whether you file as Single, Head of Household, | | | | translate to $763 less income tax.The Child Tax |
| Married Filing Joint or Qualifying Widow(er). In some | | | | Credit is phased-out by $50 for each $1,000, or part |
| cases married taxpayers filing separately are not | | | | thereof, that a married couple's AGI exceeds |
| allowed the deduction or credit at all; in others the | | | | $110,000. By reducing their AGI by $3,000 John and |
| threshold for separate filers is half that for joint | | | | Jane will increase their Child Tax Credit by $150. The |
| filers.While qualifying dividends, capital gain distributions | | | | total tax savings is $913 - $763 in reduced tax liability |
| and long-term capital gains are taxed separately at a | | | | and $150 in increased Child Tax Credit.Robert Flach is |
| lower rate, both for the regular tax and the AMT, | | | | a tax professional with 34 tax seasons of experience |
| these items of income are included in your AGI, as | | | | preparing 1040s for people in all walks of life. He |
| well as your Alternative Minimum Taxable Income | | | | writes THE WANDERING TAX PRO weblog |
| (AMTI), and can reduce or eliminate the various | | | | (rdftaxpro.tripod.com/weblog), the NJ TAX |
| deductions and credits affected by AGI, and cause | | | | PRACTICE BLOG (rdftaxpro.tripod.com |
| you to become a victim of, or increase, the | | | | newjerseytaxpractitionernetwork) and the tax |
| AMT.Because of the way the taxable portion of | | | | planning and preparation website which provides a |
| Social Security and Railroad Retirement benefits is | | | | wealth of tax advice and information. He also writes |
| calculated, for every additional $1.00 of AGI you | | | | and publishes THE FLACH REPORT, a quarterly tax |
| could be taxed on as much as $1.85. For a taxpayer | | | | newsletter. This article is expanded from a 2004 |
| in the 15% federal tax bracket who finds himself in | | | | posting to THE WANDERING TAX PRO. |