Know the Limits – Tax Credits and Tax Deductions

The adjusted gross income (AGI) and the modified adjusted gross income (MAGI) of a family or individual are major factors that can determine tax benefit eligibility. Having an AGI or MAGI that’s out of range can cause denial of certain tax benefits. This can create the same feeling of frustration you get when you can’t perform a simple physical task simply because you’re too big or too small.

It is not hard to calculate your adjusted gross income. The calculation simply requires that you take all of your income reported and subtract your standard or itemized deductions. Legally, you can take the following as deductions from your total gross income.

Expenses Associated With Employment:

• 50% of self-employment taxes 
• Cost of rent and royalties
• Any qualifying expenses relating to the performing arts
• Up to $250 of expenses, if you are an educator
• Money paid into qualified savings, investment, and retirement accounts
• Deductible medical expenses include the cost of health insurance for the self employed, contributions to Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs).
• Deductible investment expenses include the interest lost by withdrawing CDs before they mature and up to $3000 of capital losses each year.

If you’re self-employed, tax advice for you is a bit different and you should follow slightly different rules.

Business Expenses

• General business expenses
• Domestic production activities deduction
• Mileage/commuting tax deduction
• Net operating losses (NOLs)

Educational Expenses

• Student loan interest up to $2,500
• Tuition and fees up to $4,000
• Travel expenses from attending National Guard or military reserve meetings more than 100 miles from home

Other expenses include:

• Unemployment benefits repaid because of trade readjustment allowances.
• Legal fees for illegal discrimination claims,
• Jury duty pay turned over to your employer
• Moving expenses

It is very simple to find your AGI if you’ve nearly completed, or have already filed your tax return. It is located directly on the return! You can locate your AGI on line 37 of the Form 1040, line 21 of the Form 1040A, or line 4 of Form 1040EZ.  Just make sure you haven’t missed tax deductions.

To qualify for certain tax benefits you must use your modified adjusted gross income or MAGI. A modified adjusted gross income (MAGI) is your adjusted gross income (AGI) with certain deductions added back in. Several modified adjusted gross incomes (MAGIs) may be achieved, depending on the benefits you are calculating for. For example; to receive the benefit of student loan interest, you will need to add tuition fees, any foreign earned income and the expenses associated with the foreign earned income to your adjusted gross income (AGI) to figure the amount of student loan interest you may deduct.

Before choosing which tax benefits you qualify for, you’ll want to first determine your AGI and MAGI. Doing this makes it easier to determine for which tax benefits you qualify. Occasionally your AGI will be too high to claim a certain credit. Plus, it may even be too low. But, there are going to be other times when your AGI is just right!