When it comes to taxes the main income number that matters is your Adjusted Gross Income (AGI).
For the IRS your AGI and Modified AGI are the two key income numbers they care most about – more important than your taxable or gross income!
As the name suggests, adjusted gross income (AGI) is your gross income before adjustments for Schedule A itemized deductions and tax credits. It’s found on Line 11 of Tax Form 1040 and is generally larger than your taxable income (Line 15).
Why Your AGI Matters and 2024 Limits
Legally lowering your AGI is a key aspect of smart tax planning because the lower your AGI the more tax benefits you are likely to qualify for, which ultimately results in a smaller tax bill or larger refund.
AGI is crucial for various things the IRS provides limits or allowances for when it comes to your tax-advantaged savings or deductions. This includes:
- Determining eligibility for direct IRA contributions which are based on AGI, e.g., Roth IRA eligibility restricted above $228,000 AGI for married couples in 2023. See all IRA and Roth IRA limits.
- Calculating allowable medical expense deductions (threshold is 7.5% of AGI).
- Triggering additional taxes like the 3.8% surtax on net investment income which starts at $200,000 AGI for singles and $250,000 for those married filing jointly.
- Determining income-based Medicare premiums (IRMAA).
Managing your AGI To Pay Less in Taxes
Savvy taxpayers monitor their AGI to avoid getting pushed into higher tax brackets and/or estimate their tax bill. Strategies to lower AGI include:
- Pretax retirement plan contributions (401(k)s, traditional IRAs).
- Timing investment gains and sales (e.g., selling some stocks in the next year).
- Investing in low- or no-tax income sources (e.g., municipal bonds).
Key takeaway: AGI is a crucial factor impacting everything from IRA eligibility to taxes. Strategically managing your income and investments can help keep your AGI at a level that will reduce how much you owe the IRS when you file your taxes.