We pay income tax on our income. Sounds simple, right? But in truth, there is a lot of ‘figuring’ that goes on BEFORE you get to the dollar amount which tells you HOW MUCH income you pay taxes on. It’s a little complicated, but worth all your efforts. Why? Because you get to ‘adjust’ your gross income (the top part of page 1 of the 1040) by subtracting allowable deductions. Get it? Gross income, MINUS adjustments to income = ’Adjusted Gross Income’. This is good news for you!
We’ve talked in previous blogs about the kinds of deductions that you report in a separate part of your Form 1040 (the Schedule A). Those deductions need to be itemized, or listed separately. In the AGI (Adjusted Gross Income) section on the first page of the Form 1040, these deductions appear directly on the tax return. (Sometimes they are called “above the line” deductions, since they appear above the line on the tax form in the Adjusted Gross Income section.)
Who can take what?
This area can be a little tricky for DIY tax filers, so it’s a good thing to work with a qualified Tax Professional to make sure that you are eligible for the deductions and are taking all (but not more!) than is allowed. Some of it concerns specialty groups that you’ll know if you fit into – you need to wake up and pay attention to some potential deductions if you:
- are a Teacher or Educator
- are a Performing artist (along with some other qualifying professions)
- have a Health Savings Account
- have an IRA
- are a Student with loans
- paid Tuition and fees
- moved last year
- are Self-employed
- had an Early Withdrawal Penalty
- paid Alimony
- did Jury duty
- take part in Domestic production activities
Line 37 – It’s a number that you need to know!
These examples should give you a good idea of why you want to pay attention to lines 23 – 35 of the Form 1040. Not only does it reduce the tax amount that you will have to pay, but this AGI number is also used to figure out your eligibility for other financial benefits, such as your IRA contribution deduction limits, social security benefits, and the percentages of things you claim on your itemized deductions (for instance, medical expenses). PLUS, in some states they base your State Income Tax on your AGI! So…do it now, check it out with a professional, and do it right!
For more info contact Litchfield County tax attorney Martha Miller at 860-435-4666, or click on the menu above to explore our website.