Your adjusted gross income, or AGI, is your total taxable income for the year minus certain expenses. Only adjustments to income, also known as above-the-line deductions, decrease your AGI. Other items that reduce your taxable income, such as exemptions and itemized deductions, do not reduce your AGI. Reducing your AGI can help you qualify for additional income tax deductions.
Traditional IRA Contributions
If you're looking to cut a few more dollars off your tax liability, you might be able to deduct your contributions to your traditional IRA. You can always deduct these contributions if neither you nor your spouse participates in an employer plan. You can also deduct your contributions if you do participate if your income is low enough. Contributions made to an employer plan, including 401(k) and 403(b) plans, also reduce your AGI, but are not taken as a deduction on your tax return because they are already accounted for on your W-2.
Your employer might not shell out for your moving expenses, but if you moved during the last year for job reasons and you meet the qualifications, Uncle Sam will help you reduce your AGI. To qualify, your new job has to be at least 50 miles farther from your old home than your old job. Also, you must work full-time for at least 39 weeks of the first year you're in your new location, or 78 weeks in the first two years if you're self-employed.
Student Loan Expenses
If you're still paying off your student loans, you can lower your AGI by the amount of interest you pay, up to $2,500 per year if you qualify. You have to be the one who's legally responsible for the loan being paid and your income has to fall below the annual limit. For example, if you have a student loan in your name, but your parents make the payments, you can claim the deduction because the Internal Revenue Service treats it as if your parents gave you a gift and then you made the payments.
If you're self-employed, you're entitled to two additional above-the-line deductions that can further reduce your AGI. You can deduct the employer portion of your self-employment taxes. And as long as neither you nor your spouse has an employer health insurance plan in which you can get coverage, you can take your health insurance costs as an above-the-line deduction instead of as part of the medical expenses deduction, which requires itemizing.
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