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