Your AGI, short for Adjusted Gross Income, unlocks the key to many benefits, tax and otherwise. If your AGI is low enough, you can significantly cut you tax bill for child care, adopting children, buying your first nest, caring for the elderly and disabled, funding your retirement and buying certain rides. Qualifying for several other tax breaks, such as deductions for medical expenses, depends on your AGI. Many activities can bring AGI down, but not the interest you pay on your mortgage. However, that interest might shave what you report as taxable income.
What Lowers AGI
Your AGI is the difference between what you bring in and certain adjustments. These deductions include interest on loans for college, law school, medical school and other higher education pursuits, tuition and room and board for your college or spouse’s college, and money you put in your retirement nest egg. They are called “top-line” because you take the deductions to determine AGI. You’ll find these deductions on lines 23 to 36 of Form 1040; the AGI goes on line 37.
The interest you fork over on your home is an itemized deduction. Other itemized deductions include taxes on your home’s value, medical expenses, income taxes to your state or local government and contributions to charities. These tax breaks are below-the-line, which means that you already have your AGI. These itemized deductions can lower the income on which you are taxed, but do not open the window to credits that reduce the tax, not just the taxable income.
Itemized Deductions Not Automatic
The top-line items automatically shave taxable income; mortgage interest, like other itemized deductions, does not. You have to choose between itemized deductions and the standard deduction, which is a break for which you don’t need paperwork; the amount of the standard deduction is adjusted upward for inflation and depends on whether you file by yourself, as head of your house or with your betrothed. Paying your mortgage doesn’t lighten the tax burden if your standard deduction is higher than the total of the itemized ones.
Alternative Minimum Tax
Your mortgage interest can also take the edge off of the alternative minimum tax or AMT, which is geared toward taxpayers whose income gets sweetheart tax treatment and who qualify for certain deductions; AMT is designed to make sure that these people don't avoid paying taxes. If you are in that number, you get a break for interest on a mortgage to buy, build or make over your home; using a mortgage to refinance doesn't count.
- Internal Revenue Service: Understanding and Analyzing the Importance of Adjusted Gross Income
- U.S. Department of Housing and Urban Development: IRS Form 1040 Definition
- Internal Revenue Service: Form 1040 Instructions
- Internal Revenue Service: Publication 936: Home Mortgage Interest Deduction
- Internal Revenue Service: Form 6251 Instructions
- Internal Revenue Service: Form 1040-ES: Estimated Tax for Individuals
- Internal Revenue Service: Itemized Deductions, Standard Deductions: Top Frequently Asked Questions for Itemized Deductions, Standard Deductions
- Internal Revenue Service: Publication 590: Individual Retirement Arrangements: Retirement Savings Contributions Credit (Saver's Credit)
- Internal Revenue Service: Alternative Minimum Tax (AMT) Assistant for Individuals
- Internal Revenue Service: Six Facts the IRS Wants You to Know about the Alternative Minimum Tax: IRS Tax Tip 2011-47