The most important numbers on your tax return
Most taxpayers concentrate on ways to reduce their taxable income, but they need to focus on adjusted gross income instead.
Most taxpayers concentrate on ways to reduce their "taxable income." However, it is your "adjusted gross income" (AGI) -- Line 37 on Form 1040 or Line 21 on Form 1040A -- that is really the most important number on your tax return.
There are two types of tax deductions -- those allowed "above the line" and those claimed "below the line." The "line" is your adjusted gross income.
"Above the line" deductions reduce your adjusted gross income. You do not have to itemize to claim these deductions, aka "adjustments to income", which include:
- Early withdrawal penalties for CDs and savings accounts
- Educator expenses
- Job-related moving expenses
- Self-employed deductions for health insurance premiums, half of the self-employment tax and traditional retirement plan contributions.
- Student loan interest
- Traditional IRA contributions
- Tuitions and fees
Deductions "below the line" include the standard deduction, personal exemptions and itemized deductions. These deductions reduce taxable income, but not adjusted gross income.
Why is your AGI so important? Many tax deductions and credits are phased-out, or altogether eliminated, based on the amount of your AGI, or in some cases a "modified" AGI (MAGI). Some items of income are increased, and deductible losses reduced, as this number grows. Reducing your AGI could reduce the amount of taxable income you must report and increase the deductions and credits you can claim.
An "above-the-line" deduction of $1,000 could actually reduce your net taxable income by more than $1,000. The tax benefit of a deduction claimed "below the line" is always limited to the amount of the actual deduction. A $1,000 "below the line" deduction will only reduce your net taxable income by $1,000.
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VIDEO ON MSN MONEY
I had the misfortune yesterday of calling the IRS,to a number that was given on their web cite. The lady answering the phone was obviously reading from a script or was trained to sound like a robot. No need to go into detail,but it was a futile experience. It was a little like explaining Obama Care to Nancy Pelosi.
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