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PFPlanning.com
Part 8:
Federal
Income Tax Adjustments If you have filed taxes before,
you should already know that the higher your Adjusted Gross Income,
or AGI, the more taxes you are likely to pay. Your Adjusted Gross
Income will also determine your eligibility for many of the credits for
which you
might qualify .
But what determines the Adjusted
Gross Income? Your Adjusted
Gross Income is calculated by subtracting any adjustments you have from
your total worldwide income.
There are many adjustments that can
be claimed against your income. Adjustments are found on the front pages
of the forms 1040 and 1040A. There are several more adjustments that can
be claimed on the 1040 than on the 1040A. Adjustments that are on both
forms are the Educator Expenses, IRA Deductions, Student Loan
Interest, and the Tuition and Fees Deduction. On the 1040 form you
will also find adjustments for certain business expenses, health
savings account deductions, moving expenses, several self-employment
deductions, and any alimony paid.
These adjustments are set up to give
taxpayers a break on their expenditures. For example, IRA deductions
allow the taxpayer to contribute up to three thousand dollars (per
taxpayer) a year into a qualified plan and then adjust their worldwide
income by that amount. Essentially, you are not paying taxes on that
amount until you withdrawal it at retirement. This allows the taxpayer
to pay fewer taxes at present as an incentive to save for retirement. On
the 1040, penalties on early withdrawals of savings can be adjusted if
the withdrawal qualifies. Any time you make a withdrawal from retirement
accounts, you should consult a tax professional to make sure you are
prepared for the tax consequences.
Educator expenses can be
adjusted through 2005, but the adjustment is temporary, only available
for a few years. This adjustment allows qualified educators employed by
accredited institutions to deduct up to two hundred and fifty dollars
(per taxpayer) of the qualified expenses that they occurred during the
year. An example of this type of expense would be supplies for classroom
use, such as markers and paper.
Student loan interest can also
be adjusted. If you are paying on a student loan for qualified higher
education, the interest you pay annually can be adjusted from your total
worldwide income. Keep in mind that education credits are different from
the student loan interest adjustment and the tuition and fees
adjustment. Tuition and fees adjustment is taken when you have qualified
higher education expense and it is more beneficial to claim the expenses
as an adjustment than as credits. When dealing with educational
expenses, it is always best to consult a tax professional to see what
educational benefit would best suit your individual return.
If you are self-employed,
there are several adjustment that you can claim on the front page of the
1040. One half of your self-employment taxes can be claimed as an
adjustment to your income. Also, if you are paying self-employment
health insurance, SEP, SIMPLE or other qualified self-employment
retirement accounts, portions of these amounts can be deducted as well.
Paying alimony? Make sure you
have the receiving spouse’s social security number at tax time. Alimony
is fully adjustable on the 1040 to the payer. However, the receiving
spouse’s social security number must be on the return. The receiving
spouse must claim the alimony as income on his or her own return.
Some moving expenses, such as
transfers for job purposes, can also be claimed as an adjustment.
Traveling expenses, moving of your household goods, lodging and even
some meals can be claimed in moving expenses. Consult a tax professional
to make sure you qualify for this adjustment and that you claim
everything that you are able to.
Adjustments to your income will play
an important role not only in how much you pay in taxes, but also in
determining your itemized deduction amounts, the amount of various
credits you will qualify for, and any earned income that you are
entitled to. Keep in mind that you may need additional forms for some of
these adjustments and that you will need to keep receipts for various
items claimed as well. As always, you should consult a tax professional
or the IRS if you have questions.
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