A Look at Adjusted Gross Income

Adjusted gross income is a term that is used to describe an individual's income after allowable tax deductions have been subtracted. Your adjusted gross income is the amount of money that you have to pay taxes on at the end of the year. The amount of money that you actually make from your job is not the exact amount of money that you will have to pay taxes on. Your gross income is the total amount of money that you make from all sources. Then, you get to subtract certain things from that income to come up with another number. This is known as your adjusted gross income.

Tax Brackets

Your tax bracket determines how much money you have to pay in taxes. Your adjusted gross income is what is looked at in order to determine which tax bracket you fall into. In order to calculate your tax liability, you will take your adjusted gross income and multiply it by the appropriate percentage depending on which tax bracket you are in.

Deductions

In order to determine what your adjusted gross income is, you will be able to subtract a number of different deductions from your income. There are several things that are allowed as deductions according to the IRS. Many people take a standard deduction that is calculated by the IRS. This standard deduction is different for individuals and married couples.

If you do not take the standard deduction, you can itemize your deductions instead. If you choose to itemize your deductions, you will have to come up with proof of all of the different deductions that you will take. You can add up these deductions and then subtract that from your gross income to come up with your adjusted gross income. You should only itemize your deductions if you can come up with more deductions than what the total of the standard deduction is. There are many things that are allowed as deductions according to the IRS. For example, any contributions that you make to a charitable organization can be deducted from your gross income.

You can also deduct any business expenses that you pay for out of your own pocket. For example, if you are self-employed,  and you purchase office supplies for your business, you can deduct the total amount that you purchase. You can deduct new equipment purchases, vehicle maintenance or mileage and a number of other business expenses. 

If you have a home office, you can also deduct a portion of all of your home utility bills in proportion to the size of your home office. When you add up all of these deductions, many times, your adjusted gross income will be quite a bit less than the money you brought in for the year.

Retirement Savings

It is also important to remember that the government recognizes retirement contributions. In essence, if you invest in your 401k, it is invested from your pre-tax dollars and your income is reduced by the amount of your investment. Consider investing the maximum allowable into your retirement plan to reduce your adjusted gross income as well.

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