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What is AGI? And how can you reduce your taxable income?

4 min read

4 min read

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

Read on as we outline more information about Adjusted Gross Income (AGI), and why it’s important to consider reducing it before the end of the year:

What is AGI & what does it have to do with taxes?

AGI - Adjusted Gross Income shown on a tax form.

Gross income is the total of all income an individual receives in a year that isn’t exempt from tax. 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 income, unemployment income, dividends, capital gains, business income, taxable Social Security benefits, pensions and retirement income, and side jobs. AGI is total gross income less above-the-line deductions such as the educator expense deduction or the student loan interest deduction. These are located on Schedule 1 of Form 1040.

Your taxable income is your AGI minus either the standard or itemized deductions and the qualified business income deduction.

After you calculate AGI, you can claim the standard deduction to get your taxable income. Or, if eligible, you can itemize deductions if itemizing is more beneficial. Thus, calculating your AGI is an important but intermediate step in determining if your income is taxable.

How can you reduce your AGI?

You can reduce your adjusted gross income in the following ways:

1. Contribute to a Health Savings Account

If you participate in an eligible health plan, you may have the option to contribute to a health savings account or HSA up to the following amounts:

  • $3,650 (for 2022) if your health plan covers only yourself
  • $7,300 (for 2022) if you have family coverage

Those ages 55 and up can contribute up to an additional $1,000 as well to their HSA. This contribution can be made up until the due date of your return, so you can decide to make a contribution for the current year up to the tax deadline the following year.

If you have not reached the applicable contribution limit for the year, it might be a good idea to contribute.

Contributions are deductible even if you do not itemize your deductions. In addition, HSA funds can remain in the account and do not expire at the end of the year. Therefore, placing money into the HSA may enable you to cover potential out-of-pocket medical expenses in the future using tax-free funds.

2. Retirement savings

Contributions to a traditional individual retirement savings account (IRA) can reduce your adjusted gross income (AGI) dollar-for-dollar. If you have a traditional IRA, your income and any workplace retirement plan you own may limit the amount by which your AGI can be reduced. The deduction’s upper limit is $6,000 ($7,000 for those over 50 years old). Learn more about tax topics related to retirement savings.

3. Student loan interest deduction

Student loan interest is interest you paid during the year on a qualified student loan. The student loan interest deduction is an adjustment to income while filing your annual federal individual tax return. The maximum deduction you can claim is $2,500 this year – but it’s limited by your income. So, if your filing status is single, head of household, or qualified widower and your modified AGI is more than $85,000 (for 2022), you don’t qualify. If you’re filing jointly and make more than $175,000 (for 2022) you also can’t claim use this deduction to lower your AGI.

4. Educator expenses

Teachers often incur a lot of expenses out of pocket each school year. Luckily, there’s a tax advantage if this is your case. Educator expenses can reduce your AGI by offering a tax deduction of up to $300 (for 2022)  for qualified K-12 purchases like books, instructional supplies, classroom technology, and supplementary items used for the classroom. The deduction extends up to $600 (for 2022) if an educator is married to another eligible educator and filing under the status married filing jointly (up to $300 per person combined).

Where Do You Find Your AGI on Tax Forms?

When you e-file an income tax return, you must provide your prior-year AGI to verify your identity to the Internal Revenue Service (IRS). You can find your 2021 AGI on line 11 of both Form 1040 and Form 1040NR.

By taking advantage of one – or more – of these tax strategies before the end of the year, you could potentially help with reducing your taxable income. Need help? Get started with filing taxes online or with an H&R Block tax pro, we’re here for you.

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