Knowing how to lower your Adjusted Gross Income now can bring you some pleasant surprises come tax time
If you are like most Americans, your least favorite part of the spring is the arrival of tax season. Since a large majority of taxpayers have their taxes automatically deducted from their paychecks, it makes it easy to adopt an “out of sight, out of mind” approach to our taxes.
The savvy taxpayer is proactive throughout the entire tax year, and his or her reward for doing so is evident when tax season does arrive. Optima Tax Relief, a leader in the tax resolution industry, recommends all taxpayers consult with a tax professional to see what programs they can take advantage to possibly lower their adjusted gross income over the course of the year.
First, let’s think about how your taxes are calculated. In the simplest of terms, there are two key factors that drive your tax amount – your adjusted gross income (AGI) and your tax rate. These two factors work hand in hand with each other. AGI is a taxpayer’s total income from all sources, minus any adjustments or deductions to their income. It is safe to assume that the higher one’s AGI is, the higher their tax rate becomes. There are a number of different ways you can lower your AGI, which should then lower your tax liability.
If your employer offers a Health Savings Account (often known as an HSA), enrolling in the program will allow you to lower your AGI. This money is taken out pre-taxed, and in turn, lowers your total adjusted income. Even if your employer doesn’t offer any HSA benefits, many banks and private institutions have HSA programs available. Essentially, the amount you invest into your HSA is deducted from your overall income – and those saved funds can be used across a myriad of health-related expenses.
Thinking about going to school or currently enrolled? If so, you can claim qualifying expenses related to education, which also work to lower your AGI. Already graduated and paying interest towards your student loans? That student loan interest can also be taken as a deduction and lower your overall AGI come tax time.
Not only is it smart to start saving for retirement no matter how old you are, but those savings can help reduce your AGI. Whether you are participating in your company’s 401K plan, investing in a traditional IRA, or taking advantage of a self-employment retirement plan, these savings can help offset your AGI, and your tax rate.
Maximizing your deductions to minimize your adjusted gross income is always smart. Optima Tax Relief recommends checking with a tax professional to assess what tools are available to you to help you bring down that AGI and your tax rate.