Federal Income Tax Adjustments and Deductions – Adjusted Gross Income (AGI)

If you have filed taxes before, you should already know that the higher your Adjusted Gross Income, or AGI, the more taxes you are likely to pay. Your Adjusted Gross Income will also determine your eligibility for many of the credits you might qualify for.

But what determines the Adjusted Gross Income? Your Adjusted Gross Income is calculated by subtracting any adjustments you have from your total worldwide income.

Tax Deductions and Adjustments

There are many adjustments that can be claimed against your income. Adjustments are found on the front pages of the forms 1040 and 1040A. There are several more adjustments that can be claimed on the 1040 than on the 1040A. Adjustments that are on both forms are the Educator Expenses, IRA Deductions, Student Loan Interest, and the Tuition and Fees Deduction. On the 1040 form you will also find adjustments for certain business expenses, health savings account deductions, moving expenses, several self-employment deductions, and any alimony paid.

These adjustments are set up to give taxpayers a break on their expenditures. For example, IRA deductions allow the taxpayer to contribute up to three thousand dollars (per taxpayer) a year into a qualified plan and then adjust their worldwide income by that amount. Essentially, you are not paying taxes on that amount until you withdrawal it at retirement. This allows the taxpayer to pay fewer taxes at present as an incentive to save for retirement. On the 1040, penalties on early withdrawals of savings can be adjusted if the withdrawal qualifies. Any time you make a withdrawal from retirement accounts, you should consult a tax professional to make sure you are prepared for the tax consequences.

Educator expenses can be adjusted through 2005, but the adjustment is temporary, only available for a few years. This adjustment allows qualified educators employed by accredited institutions to deduct up to two hundred and fifty dollars (per taxpayer) of the qualified expenses that they occurred during the year. An example of this type of expense would be supplies for classroom use, such as markers and paper.

Student loan interest can also be adjusted. If you are paying on a student loan for qualified higher education, the interest you pay annually can be adjusted from your total worldwide income. Keep in mind that education credits are different from the student loan interest adjustment and the tuition and fees adjustment. Tuition and fees adjustment is taken when you have qualified higher education expense and it is more beneficial to claim the expenses as an adjustment than as credits. When dealing with educational expenses, it is always best to consult a tax professional to see what educational benefit would best suit your individual return.

If you are self-employed, there are several adjustments that you can claim on the front page of the 1040. One half of your self-employment taxes can be claimed as an adjustment to your income. Also, if you are paying self-employment health insurance, SEP, SIMPLE or other qualified self-employment retirement accounts, portions of these amounts can be deducted as well.

Paying alimony? Make sure you have the receiving spouse’s social security number at tax time. Alimony is fully adjustable on the 1040 to the payer. However, the receiving spouse’s social security number must be on the return. The receiving spouse must claim the alimony as income on his or her own return.

Some moving expenses, such as transfers for job purposes, can also be claimed as an adjustment. Traveling expenses, moving of your household goods, lodging and even some meals can be claimed in moving expenses. Consult a tax professional to make sure you qualify for this adjustment and that you claim everything that you are able to.

Adjustments to your income will play an important role not only in how much you pay in taxes, but also in determining your itemized deduction amounts, the amount of various credits you will qualify for, and any earned income that you are entitled to. Keep in mind that you may need additional forms for some of these adjustments and that you will need to keep receipts for various items claimed as well. As always, you should consult a tax professional or the IRS if you have questions.






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