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21 June 2017

Monitoring Adjusted Gross Income (AGI) to Minimize Taxes

Monitoring Adjusted Gross Income (AGI) to Minimize Taxes

For most business owners, determining income from one year to the next can be tricky. Interest, dividends, alimony, pensions and annuities, rental property income, royalties, income from the sale of assets and business income can all raise your annual gross income and, therefore, your taxes. That’s why it’s important to monitor your Adjusted Gross Income (AGI). AGI is gross income minus certain “above the line” deductions (retirement account contributions, self-employed health insurance and domestic production activities, just to name a few) and it can lower your tax liability. Your AGI is a primary figure on which other deductions are computed.

Estimating the current year AGI will assist you in determining whether you should consider bunching itemized deductions into one year. That’s because expenses like medical expenses and professional fees can be deducted only if they exceed a certain percentage of your AGI. Accounting Today recommends scheduling costly non-urgent medical procedures in a single year to exceed the 10% AGI floor for medical expenses (7.5% for taxpayers age 65 and older). And, to exceed the 2% AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs, into the same year whenever possible.

Other commonly bunched deductions include charitable contributions, property taxes, state income taxes, non-reimbursable employee expenses, investment expenses and hobby expenses. For instance, for San Antonio-area residents, property tax is usually due at the end of January. If you choose to bunch your property tax payments, you would pay after the first of the year for the upcoming tax and before the end of the year for the next one so that you’re paying two large sums in one year. The following year, you would probably take the standard deduction. This maneuver could lower your overall tax bill.

For specific questions on bunching deductions, feel free to contact us.

Image Copyright: miramiska / 123RF Stock Photo

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