Adjusted gross income or “AGI” is the most important concept you need to understand in order to control your tax bill. Most people haven’t really ever heard the term “adjusted gross income,” and their CPA has never sat them down to explain it.
Adjusted gross income is the number that controls how much tax you pay, what tax bracket you are in, whether or not you can take advantage of exemptions and childcare credits, and lot of other factors in the tax world.
It is becoming very important, because the democrats are always throwing out the number of $250,000 or $200,000 as the top amount that anyone should be allowed to earn without being penalized. Those numbers are adjusted gross income. Certainly, if you are making more than that, it is worth a lot of money to you to find every way you can to lower your AGI below those numbers.
Congress and the Adjusted Gross Income Issue
You may be saying, “I will never make that much money.” That’s not good, but it is no excuse not to learn about lowering your adjusted gross income. If you can cut your AGI, you might drop into a lower tax bracket of avoid paying alternative minimum taxes this year.
Once the laws are on the books, which they now are, the numbers become almost meaningless. The numbers are easy for the politicians and IRS to change. For example, in 2011, you didn’t have to worry about alternative minimum tax if you made under $175,000. In 2012, you will be paying alternative minimum tax if you make over $45,000.
There was no big argument in Congress over lowering the number, it just happened. That will hurt a lot of Americans. Similarly, the adjusted gross income limits on certain penalties and issues can easily be lowered next year or the next year.
The LegaLees Ten Tax Tips tutorial is by far the only tax tips set that addresses the AGI issues and makes recommendations that almost anyone can use.
Adjusted Gross Income Requires Above the Line Thinking
You may have never heard of “above the line” and “below the line” accounting. This terminology needs to be used by your accountant in his discussions with you, or it’s time to get a new accountant.
Above the line and below the line is referring to the last line on your 1040 tax form. Strangely, that line is the adjusted gross income line on you tax form. Anything you do above the line has an affect on your adjusted gross income. Anything you do below the line has no affect on your adjusted gross income.
The “standard deductions” most people think about when they try to do tax planning are all below the line. You want to think above the line. Yes, you save taxes with the standard deductions, but if you could get a deduction above the line, it might drop you below the alternative minimum tax cutoff or save you a ton of taxes in some other way which goes way beyond the standard deduction savings.
A small company has the ability to substantially lower your adjusted gross income, because everything that is done in the small company comes out above the line. For example if your little company buys a computer, it is a deduction that comes off your taxes above the line – above the AGI calculations. If you buy the computer directly yourself, you probably can’t even get a standard deduction for the purchase.
I’ll bet your CPA has never had discussions along these lines with you. You’re going to have to learn about these things yourself. Use the Ten Tax Tips, and get going.