How Can You Reduce Your Gross Income For Federal Taxes?
There are two different types of deductions you can take in preparing your federal taxes, you can itemize expenses and taxpayers can enter adjustments to income. Adjustments to income directly lower your gross income and determine your adjusted gross income (AGI). The goal with your adjustments is to get it as low as possible because many itemized deductions and credits are dependent on your AGI, these items can also be partially or totally excluded if your AGI exceeds a certain threshold.
The following may be used as an adjustment to lower your gross income: Educator expenses, health savings accounts (HSAs), Moving expenses for military members, Self-employment costs, Student loan interest, School fees, and Traditional IRA contribution. Rules and limitations may apply; let’s talk about some of the most popular adjustments to income.
If you are a teacher, instructor, counselor, principal, or aide for students from kindergarten through 12th grade, and work 900 hours or more in a year you can deduct up to $250 from your gross income for any expenses your incurred throughout the year.
Health Savings Account (HSAs)
If you want to achieve maximum tax savings you can by fully funding an HSA account. Putting money in an HSA is a non-taxable transaction; these contributions will decrease your taxable income. Check with your health insurance provider and ask about an HSA account there are certain requirements to be met. If you use the HSA for your medical expenses you can not itemize those same expenses. Itemizing medical expenses are mitigated by a 7.5% limitation of your AGI versus taking advantage of an HSA adjustment that’s directly reducing taxable income. HSA contributions are limited to $3,550 for individuals and $7,100 for family coverage.
Moving expenses can only be used as an adjustment to income if your move was required by a military order and be a permanent change of station. You must not have been reimbursed for your moving expenses, and you can deduct all expenses incurred by yourself, spouse, and dependents.
Self-employed individuals are required to pay self-employment taxes quarterly, you are able to deduct half of all self-employment taxes paid from your gross income. Also, you are able to deduct all premiums paid on health insurance directly from your income.
The student loan interest deduction allows you to deduct up to $2,500 from gross income for loan interest paid during the year. The exact amount depends on your income and how much interest you paid. The tuition and fees deduction allows eligible taxpayers to deduct up to $4,000 in qualifying higher education expenses for themselves, spouses, and dependents. Both student loan interest and the tuition and fees deduction can be phased out if your income exceeds certain thresholds.
Traditional IRA Contributions
The annual contribution limit for 2020 is $6,000 and $7,000 if you are over 50 years old. Single taxpayers making $75,000 or more may not use this deduction and married filing joint taxpayers no longer qualify for deduction if they make $124,000 or more. After you have determined which adjustments you qualify for you now have your AGI and can choose to either claim a standard deduction or itemize.