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The Online Advisor - September 1999
Want more tax breaks? Cut Your AGI
In their tax planning, most people focus on increasing deductible expenses, but this is only half the battle. Reducing adjusted gross income (AGI), the last number on the first page of the tax return, can be just as important. More than 20 tax-saving deductions and credits, including some of the most common, decrease as AGI increases.
For example, the personal and dependency exemptions that allow $2,750 per family member to escape taxation are reduced after AGI exceeds $189,950 on a joint return ($126,600 for singles). Itemized deductions, which include home interest and real estate taxes, begin phasing out when AGI exceeds $126,600. Losses on rental property are cut back when AGI passes $100,000, and education credits start to disappear once AGI exceeds $80,000 for joint filers and $40,000 for singles.
Effective tax planning involves increasing deductions and reducing AGI to retain the full value of those deductions.
Consider these moves
Here are some moves to consider if you're trying to reduce AGI:
Contribute the maximum to employer-provided retirement plans. If you are self-employed, consider establishing a plan. Contributions reduce AGI, and plan earnings aren't taxable until they are withdrawn.
Consider replacing interest-bearing accounts with tax-free investments. In the highest tax brackets, returns are often comparable, but earnings aren't counted toward AGI.
Invest in tax-efficient mutual funds, instead of funds that usually distribute large gains that you must report as income.
In 1999, business owners may deduct up to $19,000 worth of equipment that normally would be capitalized and depreciated over several years. However, to receive the full benefit, total assets purchased can't exceed $200,000 for the year.
These ideas for lowering AGI provide a double benefit since they also reduce your taxable income. For more tax-saving ideas, or for help in implementing those discussed here, give us a call.