When it comes to your taxes, your AGI is arguably more important than your gross income. After all, your tax burden is not calculated based on your gross income. Instead, the IRS subtracts some adjustments from your gross income to arrive at your adjusted gross income. This is what is used to calculate your tax burden.
If you can lower your AGI, you’ll also lower your tax bill. In some cases, a lower AGI can even make you eligible for other write-offs, such as those that have income limits.
To reduce your AGI, you want to take advantage of as many of those adjustments as possible. Many of these will be set in stone by the time the end of the year rolls around, such as your student loan interest payments. However, there are a few that you can still take advantage of even after December 31. If you own a small business, you can take a few additional ones too!
Let’s take a look at how to reduce your AGI after year-end.
Related: Accounting for Startups
Table of Contents
Contribute to a Retirement Account
Contributing to your retirement account allows you to pull double duty when it comes to savings. Every penny you add will be worth more in the future. But these contributions could also help reduce your AGI and, therefore, your tax burden. Just note some plans, such as a 401(k) or 403(b) can reduce your AGI, but only if you contribute during the tax year.
Individual Retirement Accounts
You can contribute to a traditional IRA until the tax return filing deadline, which is April 18, 2023, for the 2022 tax year. For the 2022 tax year, individuals can contribute up to $6,000 between all IRAs. If you are 50 or older, the catch-up contribution brings the limit up to $7,000. If your taxable income is lower than these figures, your income is the limit.
Just note that not everyone is eligible to deduct their IRA contributions. This ability is based on your income and participation in a workplace retirement plan. Make sure to double-check if you are eligible.
Reducing your AGI may help you become eligible for the Saver’s Credit, further reducing your tax bill. This non-refundable credit could help you claim up to $1,000 for individuals or $2,000 for married couples filing together. Just note that the credit is based on income, with percentages of the credit decreasing as income increases until it disappears.
You can also contribute to a spousal IRA. This is particularly helpful if your income is too high to receive a regular IRA deduction and if you participate in a work-sponsored retirement plan. Luckily, the income limits for spousal IRAs are higher.
Contribution limits are the same as traditional IRAs. Your spouse can contribute to their IRA based on your earnings. This is true even if they don’t work outside the home.
The deadline to contribute to a spousal IRA is also the tax filing return deadline.
Want to make sure you’re getting the most tax savings from your R&D that you can? Contact us to set up a consultation!
SEP or Keogh
If you have a SEP or Keogh, you may have time to reduce your AGI even after year-end. You’ll need to file for an extension, which would give you until October 16, 2023, to file your return. You’ll also have until that date to contribute to your retirement plan.
While it’s much better to contribute early so you can take full advantage of the tax-free compounding, contributing later is better than not contributing at all.
Contribute to Your Health Savings Account
If you have a health savings account, this is also a great way to reduce your AGI. You can still contribute up until the tax return filing deadline. Individuals can contribute up to $3,650. For families, the limit is $7,300.
Adding to your HSA is also a great financial move for other reasons. For one, you’ll get tax savings for the contribution. But, an HSA also allows your money to grow tax-free, allowing you to save up a healthy nest egg. You can make fee-free withdrawals for eligible expenses when you want to use the money. The list of eligible expenses is quite comprehensive.
Just note not everyone is eligible for a health savings account. You will need an eligible high-deductible health insurance plan. Contact your plan administrator to see if you qualify.
Take Advantage of All the Credits and Deductions You’re Eligible For
While you may not be able to change many possible AGI-adjustment factors after year-end, you can still make sure you claim the ones you are eligible for.
Other Savings Plans
While you can’t contribute to an employer-sponsored retirement plan after the New Year, you can still make sure you get the deduction for it. Contributions to traditional retirement accounts can allow you to defer up to $20,500 or $27,000 if you are 50 or older. Even SIMPLE 401(k) plans can help here.
If you don’t have an HSA, an FSA can still help you save and reduce your AGI. Make sure to claim these deductions.
Business and Self-Employed Options
The self-employment tax is a downside to those who are self-employed. If you want to soften the blow, it’s important that you take the deduction you are allowed for these taxes.
There is a wide variety of tax incentives available to businesses. Unfortunately, it can become confusing to wade through them all. For example, if your business develops new products or services, you may be eligible for an R&D credit. This credit is often overlooked because people don’t know it exists or how to calculate it.
To make sure you are taking all of the credits and deductions your business is eligible for, discuss your situation with a tax professional.
Are you an accountant who wants to help your clients get the most out of their tax situation? Learn more about how our software can help automate the R&D tax credit process!
Certain Payments and Interest
Depending on your employment status, you might be able to deduct your health insurance premiums, or they may not even be reported in your wages. Your health insurance premiums are deductible on your individual tax return if you are self-employed.
Student loan interest is not a huge saver. But it can add up, so make sure to claim it if you are eligible.
Reduce Your AGI and Save on Your Tax Bill
Reducing your AGI directly impacts how much you pay in taxes. If it’s after January 1 and you’re still wondering how to reduce your AGI, there are a few steps you can take. Start by contributing to your retirement and health savings accounts. Then, make sure you claim all of the credits and deductions you are eligible for. Following these simple steps can make an impact when you go to file your return.