Adjusted Gross Income

A taxpayer’s adjusted gross income is one factor that determines how much tax they owe. Taxpayers who plan today can lower their AGI (Adjusted Gross Income)

Here are a couple things taxpayers can do now to lower their AGI:

Know how adjusted gross income affects taxes

  • A taxpayer’s AGI and tax rate are important factors in figuring their taxes. AGI is their income from all sources minus any adjustments or deductions to their income. Generally, the higher the AGI, the higher their tax rate, and the more tax they pay.
  • Tax planning can include making changes during the year that can lower a taxpayer’s AGI. The taxpayer could:
    • Contribute to a Health Savings Account
    • Claim educator expenses if they’re a qualifying educator
    • Pay student loan interest Save for retirement
    • A full list is on Schedule 1 of Form 1040.
  • Retirement savings can also lower AGI.
    • Contributing money to a retirement plan at work like a 401(k) plan can reduce a taxpayer’s AGI.
    • Investing in a traditional IRA plan is another way to save for retirement and lower AGI.
    • Self-employed SEP, SIMPLE, and qualified plans are also retirement options that can lower AGI.

 

Itemize Deduction

Taxpayers who plan to itemize next year should keep these tips in mind:

  • Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.
  • Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”
  • Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home. It’s $375,000 if married filing separately. For existing mortgages, if the loan originated on or before Dec. 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.
  • Donating items and deducting money. Many taxpayers do a good summer clean-out during the warm months. They often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must itemize deductions to deduct charitable contributions and must have proof of all donations. Taxpayers can use the Interactive Tax Assistant to help determine whether they can deduct their charitable contributions.
  • Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2019.
  • Reporting gambling winnings and claiming gambling losses. Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. They can use the Interactive Tax Assistant to find out more about reporting gambling winnings and  losses next year.