The Internal Revenue Service determines your tax bill based on your adjusted gross income, or AGI. This is determined by taking your gross income and subtracting specified allowable deductions, such as contributions to a retirement account. Reducing that figure can lower the amount you’ll pay in taxes and perhaps even push you into a lower tax bracket entirely. There’s no need to resort to questionable accounting to do so. Just take advantage of common tax strategies to keep your money in your bank account and not the government’s.
Contribute to Retirement Plans
In most cases, money that you put away for retirement isn’t considered in calculating your AGI, so increasing the funds you’re squirreling away in your 401(k) decreases the amount you’ll pay taxes on now. Contributions to most Individual Retirement Accounts, up to your annual limit, also don’t count against your AGI. Roth IRAs are the exception because they are funded with after-tax dollars, but as a consolation you won’t have to pay taxes on the money when you need it later.
In most cases, the IRS doesn’t tax you based on investment gains or losses until you sell. Selling stocks that have lost value since you bought them lets you declare that loss on your taxes and deduct it from your AGI, though you also give up the chance to see the stock bounce back in value. As of publication you can deduct up to $3,000 in capital losses per year. Everything above that must be carried over to future years. If you have $10,000 in investment gains and $13,000 in losses, you can declare a $3,000 loss on your taxes.
Depending on your job and how you got it, you may be able to deduct expenses on your return. For example, as of publication educators can claim up to $250 of out-of-pocket educational expenses from their AGI directly on Form 1040. Self-employed filers should keep records of all expenses associated with their businesses so these can be deducted from gross income. If you moved to take a new job, or moved because of a demand from your existing employer, you may be able to deduct moving expenses from your gross income. If you were faced with a demand to relocate and refused, some of your expenses in the ensuing job search also are deductible and can lower your AGI.
Donate to Charity
If you plan on itemizing your donations, you’ll be allowed to subtract the value of charitable donations from your AGI. This includes both monetary and non-monetary donations. You’ll need to save receipts in case the IRS challenges your donations later. For used items like clothing or electronics, or investments like stocks and bonds, you’ll deduct the fair market value. IRS Publication 561 offers detailed guidance for how fair market value can be determined. Most can deduct up to 50 percent of AGI via charitable donation, though that amount can drop to 30 percent or 20 percent at higher income levels. This limited ability to deduct donations begins at $300,000 for married couples filing jointly, $250,000 for individuals, and $150,000 for married couples filing separately.
Use Tax Credits
The child tax credit allows those who qualify to deduct some of their child care expenses as long as their modified adjusted gross income is below the designated threshold the IRS sets for that year. The lifetime learning credit lets you deduct up to $2,000 per year for undergraduate, graduate and professional degree courses. The earned income tax credit targets the working poor, but taxpayers with a W-2 for a regular job may find themselves benefiting, particularly those with children. The maximum deduction for those with three or more qualifying children was $6,242 at time of publication. To qualify, you can't have more than $53,267 in AGI if you're married filing jointly.
- Forbes: 10 Year-End Tax Strategies
- U.S. News & World Report: 10 Ways to Lower Your Tax Bill
- CBS News: 7 Deductions That Lower Your Taxable Income
- IRS.gov: Lifetime Learning Credit
- IRS.gov: Publication 561 (4/2007), Determining the Value of Donated Property
- IRS.gov: 2015 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
- Cornell University Law School Legal Information Institute: 26 U.S. Code § 62 -- Adjusted Gross Income Defined
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