AGI: What it is – How it Works?

Posted on July 21, 2021 by Dr. David Edward Marcinko MBA MEd CMP™

ADJUSTED GROSS INCOME

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BY Dr. DAVID EDWARD MARCINKO MBA CMP®

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SPONSOR: http://www.CertifiedMedicalPlanner.org

The U.S. individual tax return is based around the concepts of Adjusted Gross Income (AGI) and Taxable Income (TI).  AGI is the amount that shows up at the bottom of page one of Form 1040, individual income tax return.  It is the sum of all of the taxpayer’s income less certain allowed adjustments (like alimony, one-half of self-employment taxes, a percentage of self-employed health insurance, retirement plan contributions and IRAs, moving expenses, early withdrawal penalties and interest on student loans).  This amount is important because it is used to calculate various limitations within the area of itemized deductions (e.g., medical deductions: 10 percent of AGI; miscellaneous itemized deductions: 2 percent of AGI). 

When a healthcare professional taxpayer hears the phrase “an above the line deduction”, the line being referenced is the AGI line on the tax return.  Generally, it is better for a deduction to be an above the line deduction, because that number helps a taxpayer in two ways.  First, it reduces AGI, and second, since it reduces AGI, it is also reducing the amounts of limitations placed on other deductions as noted above.

Obviously, if there is an above the line there is also a “below the line” deduction.  These below the line deductions are itemized deductions (or the standard deduction if itemizing is not used) plus any personal exemptions allowed. AGI less these deductions provides the taxable income on which income tax is actually calculated. All of that being said, it is better for a deduction to be an above the line deduction. Although this is a bit dry, it helps to understand the concepts in order to know where items provide the most benefit to the medical professional taxpayer.

                            PERSONAL TAXATION CALCULATIONS

Gross Income (all income, from whatever source derived, including illegal activities, cash, indirect for the benefit of, debt forgiveness, barter, dividends, interest, rents, royalties, annuities, trusts, and alimony payments-no more)

    Less non-taxable exclusions (municipal bonds, scholarships, inheritance, insurance

                                            proceeds, social security and unemployment income [full or

                                            partial exclusion], etc.).

Total Income

    Less Deductions for AGI (alimony, IRA contributions, capital gains, 1/2 SE tax,

                                               moving, personal, business and investment expenses, and

                                               penalties, etc.). 

Adjusted Gross Income (bottom Form 1040)

    Less Itemized Deductions from AGI, (medical, charitable giving, casualty,

involuntary conversions, theft, job and miscellaneous expenses, etc.), or

    Less Standard Deduction (based on filing status)

    Less Personal Exemptions (per dependents, subject to phase outs)

Taxable Income

   Calculate Regular Tax

      Plus Additional Taxes (AMT, etc.)

      Minus Credits (child care, foreign tax credit, earned income housing, etc.)

      Plus Other Taxes

Total Tax Due

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Explaining the New Taxpayer Relief Act

Posted on January 4, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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aka … The Fiscal Cliff Deal Wake-Up Call

By Lon Jefferies MBA CFP®

www.NetWorthAdvice.com

Lon JeffriesBelow is a brief summary of the major implications of the Taxpayer Relief Act that was passed by congress. The changes under the act are permanent and do not expire like the previous round of Bush tax cuts. Note, however, that laws can always be changed.

The Tax Increase That Will Impact Us All

As of December 31, 2012, the Payroll Tax Cut expired. The cut reduced the FICA tax rate by 2% in 2011 and 2012. Consequently, this Social Security tax rate will return to 6.2% for employees (as opposed to the 4.2% rate during the last two years). This tax will apply to any income below the Social Security Wage Base of $113,700.

Essentially, this change will cause an average taxpayer earning $50k per year to pay $1,000 more in federal taxes.

Income Tax Brackets

The top tax bracket will increase from 35% to 39.6% and will apply to individuals with taxable income in excess of $400k and married couples with incomes over $450k. No other changes were made to the federal income tax.

Income Tax Brackets

Taxpayers in the 10% or 15% or income tax bracket will continue paying 0% tax on long-term capital gains and dividends. A 15% capital gains and dividend tax will continue to apply to all other taxpayers not in the highest tax bracket (again, individuals with incomes above $400k and married couples with incomes above $450k). For taxpayers in the top tax bracket, the capital gains and dividend tax effectually rises to 23.8% – consisting of 20% for capital gains or dividends plus an additional 3.8% Medicare tax to boot.

Phaseout of Deductions and Exemptions

Total itemized deductions are reduced by 3% of any excess income over an established limit. That limit is adjusted gross income (AGI) of $250k for individuals and $300k for married couples. Personal exemptions are also phased out once AGI is above the same limits. The exemptions are reduced by 2% for each $2,500 of excess income over these limits.

Professional Wake Up Call

Estate Taxes

While the top estate tax rate has been increased from 35% to 40%, individuals will continue to pay no taxes on estates less than $5,120,000. This figure will continue to rise with inflation. Note: couples essentially get two of these exemptions, allowing them to pass $10,240,000 to heirs without paying estate taxes.

Alternative Minimum Tax

The new AMT exemption amount will be $50,600 for individuals and $78,750 for married couples. These figures will be adjusted annually for inflation. Speak to an account to determine how this impacts your tax return.

Bonus – Potential 401k to Roth 401k Conversions

If your employer offers Roth 401k accounts, you can now convert your traditional 401k investments to the Roth plan while still employed. This process will be similar to converting a traditional IRA to a Roth IRA and taxes will be due upon conversion. However, your employer isn’t required to offer a Roth 401k, so speak to your employer’s HR department to determine if this is an option. Further, speak with your financial planner for information on whether this is a strategy you should explore.

Conclusion

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