Your adjusted gross income is your total income minus certain allowable deductions. If your AGI is too high, it may limit the amount of other tax benefits you receive. For example, a high AGI may prevent you from converting your traditional IRA into a Roth IRA, and it might eliminate your ability to claim certain educational credits such as the American Opportunity Credit. Certain taxes and expenses can help you lower your AGI.
Retirement Plan Contributions
Contributions to all IRAs, except Roth IRAs, are generally tax-deductible and will lower your AGI. If you or your spouse are covered by an employer-sponsored retirement plan, such as a 401(k), the IRS may limit the deductibility of your contribution based on the amount of your modified adjusted gross income. For 2012, if you are married filing jointly, you can still deduct the full amount of your IRA contribution if your MAGI is $90,000 or less. For contributions to 401(k) plans and other employer-sponsored plans, your AGI is automatically reduced because your employer withholds your contributions from your paycheck.
Although business owners often gripe about having to pay self-employment taxes, they do help lower your AGI. The IRS allows you to deduct one-half of your self-employment taxes from your total income, thereby lowering your AGI. When you complete your taxes, you must attach Schedule SE to claim this deduction.
Capital losses on investments can be used to lower your AGI, at least to a limited extent. When you sell an investment such as a stock at a loss, you can use that loss to offset any of your investment gains. If you still have losses left over, you can apply up to $3,000 of that additional loss to lower your AGI. Any further losses can be carried forward and used in future years.
As a teacher, you can deduct up to $250 in qualifying educational expenses, and as a self-employed taxpayer, you can deduct the full amount of your health insurance premiums. You can deduct qualified moving expenses if you had to move because of a new job, along with any alimony you paid or contributions you made to a Health Savings Account. If you qualify, you can deduct student loan interest you paid, certain educational expenses and up to 9 percent of your "qualified production activities," as defined by the IRS on Form 8903. Certain business expenses also lower your AGI if you are a performing artist, reservist or fee-based government official. You can find definitions for all of these deductions in the IRS instructions for Form 1040.
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