Top 5 to Ways lower your Adjusted Gross Income (AGI).  Pay less taxes by decreasing your Adjusted Gross Income (AGI) and save lots of money.

Top 5 Ways to Lower Your Adjusted Gross Income (AGI)

Updated February  14, 2021

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There is an old saying that there are only two guarantees in life: Death and Taxes.  While we can’t really help you on the death part, we can provide some guidance on how to pay less taxes.   Lowering your Adjusted Gross Income (AGI) may seem like something you do not want to do, why would you want less income?  The answer is – lower AGI but keep your total income increasing each year. To be able to lower your AGI, it is important to know what is AGI and what goes into.

What is Total Adjusted Income (AGI)?

The formula for Total Adjusted Income (AGI) is Total Income – Total Adjustments = AGI.  Total income is fairly straightforward, it adds up your total wages from W2’s, Business Income, Capital Gains, and other miscellaneous income like Unemployment Compensation to get to a total.  Total Adjustments is a little more of an exercise to go through and will be what lowers your AGI and subsequently the taxes you owe.

The main categories in the Total Adjustments section are: 

a. IRA contributions

b. HSA deductions

c. Tuition deduction & Student Loan Interest

d. Educator expenses

e. Moving Expenses

f. Cash donations

All in all if you are looking for ways to lower your tax liability and either increase your refund or decrease the amount owed, these are categories you can work in to do that.  It is important to remember that the amount of taxes you is not calculated directly from your AGI but your Taxable Income, which is your AGI – Deductions.  Deductions for most people will be the standard amount (2020’s standard deduction table is below), unless your expenses are high enough to itemize. But for those that claim the standard deduction, lowering your AGI is opportunity to lower the taxes you pay. 

Top 5 Ways

Here are 5 strategies that help decrease your AGI. This list is not all-inclusive but a good place to start for those looking to lower their tax liability.  

1. IRA Contribution

401 (k), traditional IRA and SEP account are all tax deductible contributions, commonly referred to as after-tax contributions. What that means is when you contribute to these accounts it is adjusted in your AGI number to deduct those contributions.  A nice caveat with these contributions are that you can contribute up until the tax filing deadline for previous year.  So for the 2020 tax filing, you have until April 15, 2021 to contribute to these accounts to include in your adjustments.  One item to consider is the tax on the future gains.  While lowering your AGI is nice, the capital gains on after-tax retirement accounts are taxed unlike Roth accounts. Due to this, I typically lean towards HSA contribution if I am trying to decrease my AGI through retirement contributions

2. HSA Deduction

Health Savings account contributions in essence do the same things as the IRA contributions.  For every dollar you contribute to HSA accounts your AGI is lowered by that amount.  These contributions have the same date extension attribute as IRA accounts, so you have until April 15th to contribute and claim those contributions.  This is main strategy I use to decrease my AGI.  HSA accounts are tax deductible but one can also invest the funds in the HSA and the capital gains are not taxed. So HSA accounts are hybrids of traditional IRA accounts and Roth accounts, in the current year they are treated similarly to IRA accounts and future gains are treated like Roth accounts.  You can also use these funds for medical expenses as they come up. There are limits for the amount you can contribute each year, that is something to be aware of.

3. Sell “loser” stocks

Each year the IRS allows one to claim capital losses of up to $3,000.  So if you have stocks that you are upside down in your cost basis for, you could sell those stocks at a loss and claim the loss in the capital loss section to lower your AGI. There is a “wash rule” which states that you can’t reinvest in the stock within 30 days if you claim capital loss. Also good to note, that if you have losses above $3k, you can carry those losses forward and claim in future years.

4. Educational Expenses

Tuition paid out of pocket can included in your Adjustments section, as can student load interest. Be sure to track these education expenses and to take credit for it in your adjustments sections. 

5. 529 Plan’s or QTP’s

Similar to educational expenses, contributions to 529 plans can be deducted from your total income. These accounts are great ways to prepare for future education expenses and also decrease your tax liability.   

In Conclusion

Finding ways to decrease your Adjusted Gross Income (AGI) can be really helpful in saving money on your taxes, while executing these strategies it is also important to consider the long term tax and wealth impacts.  

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