Is it better to concentrate on taxable income or adjusted gross income (AGI)?
Most taxpayers tend to focus on ways to reduce their taxable income. But your AGI is a more important number that taxpayers need to focus on in regards to their tax return. This number can be found on Line 37 for Form 1040 or Line 21 on Form 1040A.
What are the “above the line” deductions?
There are two types of deductions: “above the line” and “below the line”. The word “line” refers to your AGI.
“Above the Line” deductions reduce your AGI and you do not have to itemize to claim these deductions. These adjustments as also known as "Adjustments to Income". These include:
Early Withdrawal Penalties for CDs and savings accounts
Job-related Moving Expenses
Self-employed deductions for Health Insurance Premiums, half of the Self-Employment Tax and traditional Retirement Plan Contributions.
Student Loan Interest
Traditional IRA Contributions
Tuitions and Fees
What are the “Below the Line” deductions?
The “Below the Line” deductions consist of the Personal Exemptions, Standard Deduction, as well as Itemized Deductions. These deductions will reduce Taxable Income but will NOT reduce your AGI.
Why is your AGI so important?
Several tax deductions and credits are phased-out or can be altogether eliminated. This depends on the amount of your AGI, or in some circumstances, "modified" AGI (MAGI). As this number rises, some items of income are increased, and deductible losses are reduced. Taxpayers can reduce the amount of taxable income they have to report and ultimately increase the credits and deductions they are able to claim by reducing their AGI.
An "above-the-line" deduction of $1,000 could actually reduce your net Taxable Income by more than $1,000. The tax benefit of a deduction claimed "below the line" is always limited to the amount of the actual deduction. A $1,000 "below the line" deduction will only decrease your net Taxable Income by $1,000.
Written by: Jordan Melde
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Taxpayers can reduce the amount of taxable income they have to report and ultimately increase the credits and deductions they are able to claim by reducing their AGI.