Let’s talk about everyone’s favorite subject: taxes! Just like death, taxes are a constant source of lighthearted fun. While taxes are universally loved by all, they are also known for being the slightest bit confusing at times.That’s enough sarcasm for the moment. Taxes can be complex, convoluted, and a cause for large amounts of anxiety. While taxes can be confusing, there are some key aspects that, once understood, make the rest of the system a bit less confounding. Many of the calculations for taxes are based around a few key figures. One of the most important figures for determining tax deductions and credits that you’re eligible for is your AGI tax number.
What is AGI?
Adjusted gross income (AGI) is your total income (other than non-taxable income such as gifts, disability wages, and life insurance payouts) subtracted by the total of all your “above-the-line” tax deductions. Here are some examples of income that can be taxed and a list of the more typical above-the-line deductions available to qualifying individuals.
Examples of Income Which Can Be Taxed:
• Wages and Salaries Earned
• Investment Earnings
• Stock Dividends
• Savings Account Interest
• Capital Gains
• Business Income
• Retirement Distributions
• Bonuses and Tips
Standard “Above-The-Line” Deductions:
• Contributions to Traditional IRA
• Self-Employed Retirement Plan Savings
• Penalty paid on the early withdrawal of a savings account
• Contributions to a Health Savings Account
• Interest on Student Loans
• 50% of Self-Employment Tax
Note that alimony payments are no longer deductible after December 31, 2018.
If you add up all your income and then subtract your above-the-line deductions for which you qualify, you’ll arrive at your adjusted gross income which will be listed on Form 1040: line 7. The final figure arrived at by these calculations is the number used to determine your eligibility for further tax credits and deductions that can be used to reduce the taxes you owe.
Many types of tax deductions and exemptions can vary depending on qualifying circumstances. You can choose to take the standard deduction based on your filing status or take an itemized deduction based on each one for which you qualify. You can decide which is most appropriate for you by comparing your projected itemized deductions to the standard deduction you would receive by default.
What is Taxable Income?
Taxable income is the total amount of earnings you made in the past fiscal year which qualifies for taxation. Your taxable income is equal to your adjusted gross income less the greater of your standard or itemized deductions. The following is by no means an exhaustive list but covers many of the common itemized deductions you can use to lower your taxable income and thereby reduce how much you pay in taxes.
Examples of Tax Deductions:
• Charitable Contributions
• Medical and Dental Expenses
• Home Mortgage Interest
• Income, Sales, and Property Taxes
Tax deductions vary drastically depending on specific qualifying circumstances which change fairly frequently over time. Business taxes are a bit more complex than personal taxes due to the much larger number of transactions made by a business each year and the further complication of employer taxes and rules that can vary state by state.
But now that you’ve read this and become an expert on taxes, there’s very little chance you are in need of Ignite Spot Tax Consultant services. On the off chance that you don’t feel ready to dive into the deep end of the tax world, you can give us a call with any questions you have or simply fill out this form for a free 30-minute tax consultation. We offer tax and financial services geared towards small businesses with no mandatory contracts or strings attached.
geared towards small businesses with no mandatory contracts or strings attached.