Taxes for the Young Part 1 (Understanding AGI)

Categories : Financial, News
April 10, 2024

Not only is April 15 the Due Date for Income Tax filing but April was also designated Financial Literacy Month by George W. Bush in 2003. In 2022, Gov. Ron DeSantis of Florida added financial literacy to Florida’s required curriculum. 35 States now require a course in Personal Finance to graduate, and 28 require a course in Economics. More States need to sign on, but it’s a good start.

This Blog has recently been featuring introductory lessons on Personal Finance and Income Tax, and today’s topic is an important concept called Adjusted Gross Income, or simply AGI. Reasons abound for understanding AGI, as well as its redheaded uncle, Modified AGI, or MAGI, to determine what happens on your Form 1040, U.S. Individual Tax Return, and the effect on your overall tax bill.

In a prior Blog, we covered the term “Gross Income.” The most prevalent components of Gross Income are Wages, Salaries, Tips, Interest, Dividends, Business Income from non-W-2 employers, Retirement Account Distributions, Social Security Benefits, Pensions, Annuities, and Capital Gains. These are listed as Gross Income on Page 1 of Form 1040.

Schedule 1, Part I lists other Additions to Income, including rent, gambling, jury duty pay, etc. If you have any of these, Uncle Sam wants to know.

Schedule 1, Part II, contains Adjustments to Income that reduce your income for taxation purposes. Arriving at Adjusted Gross Income, or AGI, requires combining Additional Income with Total Adjustments, and then adding to, or subtracting from, Total Income.

For most taxpayers, MAGI is the same as their AGI. Computing MAGI simply adds any tax-free interest income to your AGI.

Eligibility for certain tax-related deductions and credits is dependent on a taxpayer’s AGI (or MAGI), including the Earned Income Tax Credit (EITC) and certain Child Credits. Deductibility of Student Loan Interest is lost above a certain level of AGI, as are certain other Educational Tax Breaks.

One of the most important and useful applications of AGI and MAGI is in determining eligibility for certain Retirement Plan contributions and deductions. For IRA savers, attention needs to be paid to MAGI to determine eligibility for Roth IRA contributions, as well as the deductibility of Traditional IRA contributions.

Social Security recipients use a slightly different calculation to determine MAGI. This formula includes only half of Social Security benefits to Gross Income and then follows a formula for determining the taxable component.

Understanding the process puts you in control. Next week, we will cover Deductions to be applied to compute Taxable Income.

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