So what are adjustments, and how do they work?

Adjustments to income are specific expenses that can be used to reduce your gross income.  Some examples of adjustments are:

  • Educator expenses
  • Student loan interest
  • Tuition and fees
  • IRA plan and HSA contributions

There are also deductions, some of which you can itemize or take a standard deduction.  A few examples of common deductions are:

  • Medical expenses
  • Home mortgage interest
  • Personal property and real estate taxes
  • Charitable contributions

When you subtract your adjustments (exemptions and deductions) from your income, the remainder is your AGI (Adjusted Gross Income). Lowering your AGI reduces your taxable income.

What are the essentials that you need to know about AGI?  Well, there are two main considerations:

  • As your AGI surpasses specific thresholds, your personal exemptions and itemized deductions are reduced. For example, personal exemptions are phased out by 2% for each $2,500 that your AGI exceeds the threshold.  For many deductions, they are reduced by 3% of your AGI over the threshold or 80% of the total of itemized deductions allowed for that tax year.
  • Deductions which are allowed, are only allowed to the point where they exceed an allotted percentage of the AGI. For instance, the following expenses are deductible only if they surpass a percentage of the AGI:
  • Medical Expenses > 10% of AGI
  • Theft & Casualty Losses > $100 + 10% of AGI

In short, take advantage of adjustments to income, but also remember that some have AGI limitations.

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