Tax Tips That Lower Adjusted Gross Income Are A Lot More Valuable Than Standard Deduction Tax Tips
Most tax tips and tax planning center around “standard deductions.” Standard deductions are deductions like the home mortgage deductions, medical expenses and charitable contributions. They don’t have any affect on adjusted gross income.
Adjusted gross income is the tax number that controls what tax bracket you are in, what exemptions you get, when certain deductions phase out, what you pay in alternative minimum tax, and a half a dozen other important tax issues. Your adjusted gross income is shown on the last line of page one of your 1040 form, which is “The Line.”
“The Line” is an important concept in tax planning. Anything done above the line lowers or raises your adjusted gross income. Anything done below the line has no affect on your adjusted gross income. Because adjusted gross income is the number that controls your tax destiny, it is a lot more important to work above the line than it is below the line.
Tax Tips above the Line
There really isn’t a lot that you can do above the line as an individual. There are a lot of lines to fill out, but moving expenses, school purchases by teachers in the third month of the year when there is a blue moon, penalties for IRA withdrawals, and student loan interest paid are things that just don’t apply to most people. And, they aren’t the big deductions that will really make a difference in a person’s adjusted gross income calculations if they have a nice healthy income.
You’ve got to be able to remove a hundred thousand dollars off your income if you are a successful small business owner. There’s been all this talk of hitting the rich with higher taxes. The rich are defined as couples with over $250,000 in income. That income is adjusted gross income. Therefore, if a successful small business person is showing $350,000 profit this year, they have got to figure out how to get their adjusted gross income down to well under the $250,000 level.
There are two lines “above the line” that let a person really shine in controlling their adjusted gross income. One is the business income or loss and the other is the “Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E” line. Basically, your business and your real estate investing are the two places you need to concentrate on developing a tax plan.
Adjusted Gross Income Tax Tips that Make a Difference
Tax tips that are for the company or the real estate can make a real difference. Part of the problem is these tips aren’t just a “make an adjustment at the end of the year” type deal. They require your attention every day all year.
Controlling adjusted gross income is a way of life, not a “change the position” of a number on the tax return April 15th. You have to work all year to “generate” the numbers that go on the tax form. For example, if you are going to rent your residence and get tax free income from the rental, you need to plan those rental days early in the year and have a good business reason for the rental days. The tax tip of renting your residence tax free is a valid tip, but you can’t decide you are going to do that on December 15th and rent the residence the last two weeks of the year.
Your little business (or not so little business) and your real estate investments are your two most important tax shelters, because whatever happens in those two areas of your life are things that happen above the line. That means they lower your adjusted gross income.
Even if you’re not making $250,000, if you can lower your adjusted gross income, you may be able to drop to a lower tax bracket. Then your tax savings become more than just what you are able to “deduct.” You’ll actually save tax on dollars that are subject to tax.
I’ve come up with ten tax tips that can really make a difference for most people who can work above the line. If you are simply a W2 employee, you’re not going to be able to have much of an affect on your adjusted gross income. You need to develop a company that does something. Have a company that collects and sells baseball cards, organizes family reunions, writes sales copy for other people, or does something you have an interest in.
Once you’ve got the company, then the tax tips can be applied. Controlling your taxes may mean the difference between financial survival and disaster in the coming years. We’ll do whatever we can at LegaLees LLC to help you be successful in your personal life or your business life. We’ve helped over a million people on their road to success over the past 30 years.