When it’s time to calculate your tax bill, knowing your adjusted gross income (AGI) is a crucial first step. If you file your tax return online (or have your tax preparer do it), you’ll need your AGI from the previous tax year to prove your identity to the IRS. In addition, your AGI determines your eligibility for a range of tax breaks that could lower your tax bill.
Calculate adjusted gross income
Your adjusted gross income is made up of income from various sources, including your wages, self-employment income, interest from bank accounts, capital gains, dividends, rental income and retirement plan distributions, minus adjustments, including interest on student loan payments as well as contributions to traditional IRAs and 401(k)s and health savings accounts. You can find your AGI on line 11 of your 1040 tax form.
Several money-saving tax credits, including the child and dependent care credit, as well as credits for older adults and those who are permanently disabled, are available to taxpayers whose AGI falls within certain thresholds. Your modified adjusted gross income, discussed below, is also tied to a range of tax breaks. For that reason, taking steps to keep your AGI below those limits could benefit you, now and in the future.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Reducing your AGI
Contributions to a traditional IRA will reduce your AGI on a dollar-for-dollar basis, and there’s still time to use traditional IRA contributions to reduce your 2023 AGI. If you’re not enrolled in a workplace retirement plan, you can deduct a contribution of up to $6,500, or $7,500 if you were 50 or older, for 2023. You have until April 15, 2024, to make your 2023 contribution.
If you have a company retirement plan but earn less than a certain amount, you may also qualify to deduct all or part of your IRA contributions.
- For 2023, this deduction phases out for single taxpayers with AGI between $73,000 and $83,000 and for married couples who file jointly with AGI between $116,000 and $136,000.
- If one spouse is covered by a workplace plan but the other is not, the spouse who isn’t covered can deduct the maximum contribution, as long as the couple’s joint AGI doesn’t exceed $218,000.
- A partial deduction is available if the couple’s AGI is between $218,000 and $228,000.
Contributing to a health savings account will also reduce your AGI, and you have until April 15 to set up and fund a health savings account for 2023. To qualify, you must have had an HSA-eligible insurance policy in 2023 that started no later than December 1. The policy must have had a deductible of at least $1,500 for individual coverage or $3,000 for family coverage.
You can contribute up to $3,850 to a 2023 HSA if you had single coverage or $7,750 if you had family coverage. You can contribute an additional $1,000 if you were 55 or older in 2023.
It’s too late to contribute to your 2023 401(k), but contributions that you make this year will lower your 2024 AGI. You can stash up to $23,000 to your 401(k) or other employer-provided retirement plan in 2024, plus $7,500 in catch-up contributions if you’re 50 or older.
AGI vs. MAGI
A long list of other tax breaks, including the child tax credit, the American Opportunity Credit and the adoption credit, are tied to your modified adjusted gross income (MAGI). Your MAGI also determines your eligibility to contribute to a Roth IRA.
MAGI is your AGI with a handful of deductions added back, including student loan interest, tax-exempt Social Security payments and excluded interest on savings bonds. Since these “add backs” are uncommon, many taxpayers’ AGI and MAGI are the same.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
IRS Tax Refunds Are $526 Bigger This Year: Here's WhyTax Refunds Inflation-related changes to the tax code could result in a larger refund.
-
Retire in Costa Rica With These Three Tax BenefitsRetirement Taxes Costa Rica may be a good place for retirement if you like the low cost of living and savings for your heirs.
-
Ten IRS Audit Red Flags for Self-Employed IndividualsIRS Audits Taxpayers who file Schedule C with their Form 1040 have a greater chance of an IRS audit.
-
Trump Wants You Out of the IRS, But You'll Have to Wait Until MayIRS Some IRS employees won’t be able to resign using the buyout offer until the end of tax season.
-
Are Tips Taxable in 2025? Understanding the IRS RulesTaxable Income With all the recent talk about ending federal taxes on tips, some wonder whether tips are taxable income.
-
What's Going on With New Jersey Property Tax Programs?Property Tax ANCHOR and ‘Senior Freeze’ just got a refresh, and there’s a new program: Stay NJ. Learn how to save on New Jersey property taxes.
-
States That Won't Tax Your Retirement Income in 2025Retirement Taxes Several states don’t tax Social Security benefits, 401(k)s, IRAs, and pensions. But you may still have to pay state taxes on some incomes.
-
Navigating 1099s: A Guide to All 22 IRS Tax Forms to KnowTax Filing You should receive your 1099 form by February 15. But what happens next?
