For some, ‘AGI’ means ‘AGH!’
There’s a little number at the bottom of Page 1 of the federal 1040 tax form that we’re obsessed with this time of year. It’s AGI (adjusted gross income), and it seems innocuous, just sitting there – it doesn’t really even determine tax liability. But it can be as dangerous as a cobra waiting to strike.
AGI is a figure that can turn taxpayers’ gladness into grief. It is the number that the federal tax system uses to administer penalties – and to dole out favors. Too high AGI, and you lose. It’s also the number that the Illinois tax system uses to determine taxable income.
AGI puts into play what is known as the federal stealth tax. It does so by reducing deductions. It is the number that determines whether you qualify for the Earned Income Credit, rental real estate losses, personal exemptions, itemized deductions (including mortgage interest, property taxes, state income taxes and charitable contributions), IRA contributions (including Roth, deductible and education), tuition deduction, student loan interest deduction, the child tax credit, education credits, the retirement savings credit and the AMT exemption.
Think the highest tax bracket is 35%? That’s what the IRS tells us – but it’s not. It is actually much higher due to “stealth taxes.”
How can you reduce AGI and avoid stealth taxes? Increase your above-the-line (non-itemized) deductions like 401(k), deductible-IRA and flexible spending contributions. Defer bonuses to next year. If you own a business, accelerate expenses into this year.
Tax planning is a year-round exercise. Although there is still some time to affect 2006 before it’s too late, more opportunities exist early in the year.
