| Most taxpayers concentrate on ways to reduce their | | | | your Alternative Minimum Taxable Income (AMTI), and |
| "taxable income". However, beginning with the Tax | | | | can reduce or eliminate the various deductions and |
| Reform Act of 1986, your "Adjusted Gross Income", or | | | | credits affected by AGI, and cause you to become a |
| AGI, has become the most important number on your | | | | victim of, or increase, the AMT. |
| tax return. | | | | Because of the way the taxable portion of Social |
| Many tax credits and deductions are phased-out, or | | | | Security and Railroad Retirement benefits is calculated, |
| altogether eliminated, based on your AGI, or in some | | | | for every additional $1.00 of AGI you could be taxed |
| cases a "Modified" AGI (no gift from this MAGI), and | | | | on as much as $1.85. For a taxpayer in the 15% |
| several items of income are increased and some | | | | federal tax bracket who finds himself in this situation a |
| deductible losses are reduced as this number grows. | | | | $1,000 increase in AGI could increase the tax liability by |
| The Tax Reform Act of 1986 started the ball rolling by | | | | $278.00 - almost 28%. |
| limiting the allowable rental loss deduction for | | | | There are several moves you can make to reduce |
| taxpayers with an AGI in excess of $100,000 and | | | | your AGI: |
| phasing-out the amount of IRA contributions that could | | | | * Maximize "pre-tax" contributions to your 401(k), |
| be deducted based on an AGI threshold. The Budget | | | | 403(b) or other pension or deferred compensation |
| Reconciliation Act of 1990, the Taxpayer Relief Act of | | | | plans, including any "catch-up" contributions for |
| 1997 and the many tax Acts passed under George W | | | | participants age 50 or older. |
| all continued the trend of limiting credits and deductions | | | | * Maximize the amount of wages set aside in an |
| based on AGI. | | | | employer-sponsored "pre-tax" medical expense or |
| Items that are affected by your AGI (or MAGI) include: | | | | dependent care flexible spending account. |
| * the taxable portion of interest on US Savings Bonds | | | | * Postpone the receipt of a year-end bonus until next |
| used to pay for education, | | | | year. |
| * losses from rental real estate activities with active | | | | * Postpone billing clients until January, accelerate or |
| participation, | | | | prepay business expenses at year-end, and maximize |
| * the taxable portion of Social Security and Railroad | | | | contributions to a SEP, SIMPLE or Keogh plan if you |
| Retirement benefits, | | | | are self-employed. |
| * deductible traditional and spousal IRA contributions, | | | | * Accelerate or prepay expenses at year-end if you |
| * the ability to contribute to a ROTH IRA, and to | | | | own rental property. |
| convert a traditional IRA to a ROTH, | | | | * Sell investments at a loss to take advantage of the |
| * student loan interest, | | | | maximum $3,000 net capital loss deduction. |
| * the deduction for tuition and fees, | | | | * Maximize deductible contributions to a traditional IRA, |
| * medical and dental expenses, | | | | including catch-up contributions. |
| * charitable contributions, | | | | * Instead of deducting the total fee for tax preparation |
| * casualty and theft losses, | | | | as a "miscellaneous" deduction on Schedule A, allocate |
| * job expenses and most other "miscellaneous" | | | | a portion of the fee, if applicable, to Schedule C and/or |
| deductions, | | | | Schedule E. |
| * total Itemized Deductions, | | | | * Invest in tax-free municipal bonds or tax-deferred US |
| * the deduction for personal exemptions, | | | | Savings Bonds instead of bank CDs (remember that |
| * the dreaded Alternative Minimum Tax (AMT), | | | | tax-exempt interest is included in the calculation of |
| * the Credit for Child and Dependent Care Expenses, | | | | taxable Social Security and Railroad Retirement |
| * the Credit for the Elderly or Disabled, | | | | benefits). |
| * the HOPE and Lifetime Learning education credits, | | | | Let us look at an example where reducing AGI by |
| * the Retirement Savings Contributions Credit, | | | | $1,000 could result in $913 less federal tax - a 91.3% |
| * the Child Tax Credit, | | | | tax savings! |
| * the Adoption Credit, | | | | John and Jane Q. Taxpayer anticipate an AGI of |
| * the Earned Income Credit, | | | | $130,450 for 2005. They will be in the 25% tax |
| * Coverdell Education Savings Account contributions, | | | | bracket. John and Jane have three dependent children, |
| and | | | | two under age 17 and one who is a college freshman. |
| * the safe harbor amount for quarterly estimated tax | | | | They paid $5,000 in college tuition and their |
| payments. | | | | miscellaneous deductions are more than 2% of their |
| Each of the items listed above has a separate set of | | | | AGI. |
| AGI thresholds. For some items, such as the education | | | | If J and J gave an additional $1,000 to charity before |
| credits and the deductions for student loan interest and | | | | year-end they will save $250 in federal income tax. If, |
| tuition and fees, the amount for joint filers is twice that | | | | instead, they can reduce their AGI by $1,000 they will |
| for unmarried taxpayers; for some it is not. For the | | | | put an additional $913 in their pocket. |
| reduction of Itemized Deductions the threshold is the | | | | By reducing their AGI from $130,450 to $129,450 they |
| same whether you file as Single, Head of Household, | | | | will be able to deduct an additional $2,000 in tuition and |
| Married Filing Joint or Qualifying Widow(er). In some | | | | fees as an "adjustment to income", which will further |
| cases married taxpayers filing separately are not | | | | reduce their AGI. This brings their total AGI reduction to |
| allowed the deduction or credit at all; in others the | | | | $3,000. As a result they will be able to deduct an |
| threshold for separate filers is half that for joint filers. | | | | additional $60 in miscellaneous deductions on Schedule |
| While qualifying dividends, capital gain distributions and | | | | A. The taxable income on their 2005 Form 1040 is |
| long-term capital gains are taxed separately at a lower | | | | reduced by a total of $3,060, which will translate to |
| rate, both for the regular tax and the AMT, these | | | | $763 less income tax. |
| items of income are included in your AGI, as well as | | | | |