Lowering your adjusted gross income (AGI) can save you a lot of money. The most obvious way it saves you money is by lowering your taxable income, thus lowering the amount of tax you have to pay. Having a lower AGI also saves me money since it increases the amount of my premium tax credit making my health insurance bill less. Since my student loan is on income-based repayment a lower AGI also reduces the amount of my monthly student loan payment. For higher income earners lowering their AGI can allow them to be able to contribute to a Roth IRA. Also, many itemized deductions are tied to your AGI. For instance, medical expenses are deductible to the extent that they exceed 10% of your AGI.
There are several ways to lower your AGI. To find different ways to reduce your AGI all you need to do is look at the Adjusted Gross Income section at the bottom of the front page of Form 1040. It is unlikely you will qualify for all of the different ways to reduce your AGI but you most likely qualify for a few of them. For 2014 I managed to reduce my AGI from $30,000 to $20,000. I did this by maxing out my traditional IRA, contributing $2200 to my health savings account, getting a student loan interest deduction, getting a self-employment tax deduction, and the self-employed health insurance deduction. Moving expenses, educator expenses, and the tuition and fees deduction are some of the other common ways to lower AGI.
Contributing to a 401k is another great way to lower your AGI. The 401k doesn’t show up on the Form 1040 because these contributions go straight to the 401k account and aren’t included in taxable income or reported on the 1040. Unfortunately, I don’t have access to an employer 401k plan since my employment is seasonal or temporary. I’m considering opening a solo 401k, but I’m not sure I will have enough money to contribute to make it worth opening an account.
Although I managed to reduce my AGI by almost a third last year I could have done even better. If I would have maxed out my HSA, paid more on my student loans, and opened and contributed to solo 401k it is possible I could have reduced my federal income tax to zero. Of course, you do need some money to live on and all of these ways to lower your AGI reduce your spendable income so there is a limit to how low you can go on your AGI.
Has anyone else managed to lower their AGI by a large percentage? If you have any other suggestions for lowering AGI I would love to hear them.