Understanding Adjusted Gross Income

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bg5
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Understanding Adjusted Gross Income

Post by bg5 » Wed May 06, 2020 6:54 am

Good Morning,

My wife and I are trying to make sure we are being tax efficient and we also are not sure if we totally understand adjusted gross income that is calculated on our taxes. When we looked up the federal tax brackets for 2020 we see that we need our adjusted gross income to be under $105,000 in 2020 to remain in the 12% tax bracket which is our goal. Please review below and let me know if I am understanding this correctly.

Combined income for 2020 will be = $167,000 (our goal is to have our AGI below $105,000 so we remain in 12% tax bracket)

Ways to get Adjusted Gross Income Down
-Standard Deduction = $24,800
-Health Savings Account = $2700
-Her 403b = $19,500
-My 403b = $10,500
-Dependant Care Flex Spending Account = $5000

These added up = $62,500.............so I take $167,000 - $62,500 = $104,000 Adjusted Gross Income.


Does this sound right and am I understanding this correctly?

One last thing......if we happen to go over a bit (LEts just assume around AGI was $110,000) would only $5000 be subject to the 22% tax bracket?

Silk McCue
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Re: Understanding Adjusted Gross Income

Post by Silk McCue » Wed May 06, 2020 7:00 am

Yes. Your analysis is correct for how much of your income will be taxable. EDIT - (Please see Livesoft's post below regarding AGI calculation.) Also the the marginal brackets only apply to the portion of the income that fall within in it.

Play around with this excellent online tax calculator and "play" with the numbers to see how the brackets apply.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers
Last edited by Silk McCue on Wed May 06, 2020 7:16 am, edited 2 times in total.

livesoft
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Re: Understanding Adjusted Gross Income

Post by livesoft » Wed May 06, 2020 7:04 am

Sorry, but this is probably NOT correct. Look at and read Form 1040. You will see that Adjusted Gross Income is NOT the same as Taxable Income. The standard deduction subtraction comes below the line with Adjusted Gross Income on Form 1040.

The standard deduction (or itemized deduction) does not affect your Adjusted Gross Income.

https://www.irs.gov/pub/irs-pdf/f1040.pdf
Last edited by livesoft on Wed May 06, 2020 7:30 am, edited 1 time in total.
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mouses
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Re: Understanding Adjusted Gross Income

Post by mouses » Wed May 06, 2020 7:14 am

livesoft wrote:
Wed May 06, 2020 7:04 am
Sorry, but this is probably NOT correction. Look at and read Form 1040. You will see that Adjusted Gross Income is NOT the same as Taxable Income. The standard deduction subtraction comes below the line with Adjusted Gross Income on Form 1040.

The standard deduction (or itemized deduction) does not affect your Adjusted Gross Income.

https://www.irs.gov/pub/irs-pdf/f1040.pdf
+1
line 8b AGI
line 9 deduction standard or itemized
line 10 some business thing
line 11a sum of line 9 and 10
line 11b taxable income 8b - 11a

terran
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Re: Understanding Adjusted Gross Income

Post by terran » Wed May 06, 2020 7:24 am

A couple of points (some of which have been explained or alluded to by other posters while I was writing):
1) Your tax bracket is based on taxable income, not AGI (although the AGI you mention does roughly coincide with the top of the 12% bracket if you take the standard deduction). The top of the top of the 12% bracket for MFJ in 2020 is $80,250 taxable income.
2) Your last question is a common misconception: if you go into the next tax bracket only the income in that bracket is taxed at the new rate, not all of your income. So if you go $1 dollar into the 22% bracket you'll only owe an extra $0.22.
3) The standard deduction does not decrease AGI, but it does decrease taxable income.
4) AGI and Modified AGI (which varies depending on what it's being used for) do effect some things, like IRA deduction limits

All that said, you're on the right track, but not quite right. With $167k income and $37.7k of paycheck deductions your AGI will be $129.3k and your taxable income will be $104.5k, which puts you $24.25k into the 22% bracket.

If you max out her 403(b) for $19.5k, max out the HSA for $7.1k (assuming it's a family plan) and contribute $6k to traditional IRAs for each of you (which you'd be eligible to deduct with as little as $500 in additional deductions) then you could get your taxable income down to $79.1k which is $1150 below the top of the 12% bracket.

Taking a look through your completed 2019 tax return should give you a better sense of this. In particular, schedule 1 for the IRA deduction and lines 8b through 11b for the differences between AGI and taxable income. If you you have dividends and/or capital gains in a taxable account you should also try completing the Qualified Dividends and Capital Gain Tax Worksheet on page 33 of the Form 1040 instructions which will help you understand how your amount of taxable income effects your long term capital gain and qualified dividend tax rates.

Edit: I made a mistake somewhere in my calculations as pointed out below, so you won't be able to get AGI low enough for a full IRA deduction, and therefore probably can't get to the 12% bracket.
Last edited by terran on Wed May 06, 2020 12:46 pm, edited 2 times in total.

Enganerd
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Re: Understanding Adjusted Gross Income

Post by Enganerd » Wed May 06, 2020 7:26 am

mouses wrote:
Wed May 06, 2020 7:14 am
livesoft wrote:
Wed May 06, 2020 7:04 am
Sorry, but this is probably NOT correction. Look at and read Form 1040. You will see that Adjusted Gross Income is NOT the same as Taxable Income. The standard deduction subtraction comes below the line with Adjusted Gross Income on Form 1040.

The standard deduction (or itemized deduction) does not affect your Adjusted Gross Income.

https://www.irs.gov/pub/irs-pdf/f1040.pdf
+1
line 8b AGI
line 9 deduction standard or itemized
line 10 some business thing
line 11a sum of line 9 and 10
line 11b taxable income 8b - 11a
Not to hijack the thread but tax brackets for capital gains use AGI or taxable income? From https://www.irs.gov/taxtopics/tc409

"A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately."

The term taxable income is used, not AGI. So standard deduction would be part of the calculation for determining expected tax burden for capital gains.

terran
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Re: Understanding Adjusted Gross Income

Post by terran » Wed May 06, 2020 7:31 am

Enganerd wrote:
Wed May 06, 2020 7:26 am
Not to hijack the thread but tax brackets for capital gains use AGI or taxable income? From https://www.irs.gov/taxtopics/tc409

"A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately."

The term taxable income is used, not AGI. So standard deduction would be part of the calculation for determining expected tax burden for capital gains.
See my link above to the Qualified Dividends and Capital Gain Tax Worksheet where you'll see that the capital gains tax calculations start with the amount entered on From 1040, line 11b, so they're based on taxable income.

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Cyclesafe
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Re: Understanding Adjusted Gross Income

Post by Cyclesafe » Wed May 06, 2020 7:56 am

When calculating "AGI" one must always consider the purpose it is being calculated for. The definition changes with different applications.

It's best to use the appropriate tax form as a guide. The devil in in the details...
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)

kaneohe
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Re: Understanding Adjusted Gross Income

Post by kaneohe » Wed May 06, 2020 8:23 am

Cyclesafe wrote:
Wed May 06, 2020 7:56 am
When calculating "AGI" one must always consider the purpose it is being calculated for. The definition changes with different applications.

It's best to use the appropriate tax form as a guide. The devil in in the details...
perhaps you thinking of MAGI? AGI is unique is my understanding.

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Cyclesafe
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Re: Understanding Adjusted Gross Income

Post by Cyclesafe » Wed May 06, 2020 8:31 am

kaneohe wrote:
Wed May 06, 2020 8:23 am
Cyclesafe wrote:
Wed May 06, 2020 7:56 am
When calculating "AGI" one must always consider the purpose it is being calculated for. The definition changes with different applications.

It's best to use the appropriate tax form as a guide. The devil in in the details...
perhaps you thinking of MAGI? AGI is unique is my understanding.
Yes. Don't know if AGI is sacrosanct, but indeed I was thinking about MAGI. Thanks for the catch.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)

aristotelian
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Re: Understanding Adjusted Gross Income

Post by aristotelian » Wed May 06, 2020 8:40 am

Cyclesafe wrote:
Wed May 06, 2020 7:56 am
When calculating "AGI" one must always consider the purpose it is being calculated for. The definition changes with different applications.

It's best to use the appropriate tax form as a guide.
The devil in in the details...
+1, doing a 1040 by hand takes about 10 minutes and will be time very well spent.

rkhusky
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Re: Understanding Adjusted Gross Income

Post by rkhusky » Wed May 06, 2020 11:50 am

terran wrote:
Wed May 06, 2020 7:24 am
If you max out her 403(b) for $19.5k, max out the HSA for $7.1k (assuming it's a family plan) and contribute $6k to traditional IRAs for each of you (which you'd be eligible to deduct with as little as $500 in additional deductions) then you could get your taxable income down to $79.1k which is $1150 below the top of the 12% bracket.
You can't use the tIRA deduction in the calculation to determine tIRA deductibility. If OP maxes out 403B and HSA like you say, they are still short of full deductibility, but eligible for partial deductibility.

terran
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Re: Understanding Adjusted Gross Income

Post by terran » Wed May 06, 2020 12:44 pm

rkhusky wrote:
Wed May 06, 2020 11:50 am
terran wrote:
Wed May 06, 2020 7:24 am
If you max out her 403(b) for $19.5k, max out the HSA for $7.1k (assuming it's a family plan) and contribute $6k to traditional IRAs for each of you (which you'd be eligible to deduct with as little as $500 in additional deductions) then you could get your taxable income down to $79.1k which is $1150 below the top of the 12% bracket.
You can't use the tIRA deduction in the calculation to determine tIRA deductibility. If OP maxes out 403B and HSA like you say, they are still short of full deductibility, but eligible for partial deductibility.
You're right. At some point in my calculations I had them under the $104k IRA deduction limit by maxing out all other accounts, but that would only result in getting AGI down to $115.9k, so I must have double counted something somewhere along the way.

delamer
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Re: Understanding Adjusted Gross Income

Post by delamer » Wed May 06, 2020 1:08 pm

-Standard Deduction = $24,800 (this does not reduce AGI, but is subtracted from AGI to arrive at your Taxable Income. Taxable Income determines your marginal tax bracket)

-Health Savings Account = $2700 (this reduces AGI)

-Her 403b = $19,500 (this reduces AGI)

-My 403b = $10,500 (this reduces AGI)

-Dependant Care Flex Spending Account = $5000 (this reduces AGI)

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gr7070
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Re: Understanding Adjusted Gross Income

Post by gr7070 » Wed May 06, 2020 2:17 pm

I don't think this was commented on, but with 403b jobs are you also making tax deductible contributions to pension plans?

Topic Author
bg5
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Re: Understanding Adjusted Gross Income

Post by bg5 » Thu May 07, 2020 7:17 am

We do contribute to our pensions but its not tax deffered

livesoft
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Re: Understanding Adjusted Gross Income

Post by livesoft » Thu May 07, 2020 7:25 am

bg5 wrote:
Thu May 07, 2020 7:17 am
We do contribute to our pensions but its not tax deffered
Technically, I think it is tax-deferred. Do you pay income tax on the money that is contributed to your pension? (I will guess: No.) Will you pay income tax on any future payments of your pension to you in retirement? (I will say: Yes.)
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GuyInFL
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Re: Understanding Adjusted Gross Income

Post by GuyInFL » Thu May 07, 2020 7:27 am

This excel spreadsheet is helpful for these what-Ifs

https://sites.google.com/site/excel1040/

kaneohe
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Re: Understanding Adjusted Gross Income

Post by kaneohe » Thu May 07, 2020 7:30 am

bg5 wrote:
Thu May 07, 2020 7:17 am
We do contribute to our pensions but its not tax deffered
this might be a matter of how you think about it. The only 403b s I know reduced your reported salary so offered tax deferred savings. For example if your total salary was 100K and you contributed 20K to 401K, your federal reported gross income was 80K. Or you can think of your reported federal W2 income as 80K and there would be no reduction to that from the 403b because your salary had already been reduced.

bgf
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Re: Understanding Adjusted Gross Income

Post by bgf » Thu May 07, 2020 8:00 am

I know you are focused on AGI in the original post, but if your end goal is really to reduce your effective tax rate, then you should also take into account your child tax credit.

You might be surprised to see your actual projected effective tax rate after taking the credit(s) into account.

We make in the same ball park what you do and also max our accounts. It always boggles my mind how low our effective federal income tax rate is.
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livesoft
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Re: Understanding Adjusted Gross Income

Post by livesoft » Thu May 07, 2020 8:03 am

bgf wrote:
Thu May 07, 2020 8:00 am
It always boggles my mind how low our effective federal income tax rate is.
And more than 40% of US families don't pay any federal income taxes.
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rkhusky
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Re: Understanding Adjusted Gross Income

Post by rkhusky » Thu May 07, 2020 10:00 am

livesoft wrote:
Thu May 07, 2020 7:25 am
bg5 wrote:
Thu May 07, 2020 7:17 am
We do contribute to our pensions but its not tax deffered
Technically, I think it is tax-deferred. Do you pay income tax on the money that is contributed to your pension? (I will guess: No.) Will you pay income tax on any future payments of your pension to you in retirement? (I will say: Yes.)
With my pension, the employer contribution was tax deferred, the employee contribution was not. So, I don’t pay income tax on the full pension.

kaneohe
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Re: Understanding Adjusted Gross Income

Post by kaneohe » Thu May 07, 2020 10:10 am

bg5 wrote:
Thu May 07, 2020 7:17 am
We do contribute to our pensions but its not tax deffered
Is this pension separate from the 403b?

delamer
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Re: Understanding Adjusted Gross Income

Post by delamer » Thu May 07, 2020 10:12 am

livesoft wrote:
Thu May 07, 2020 7:25 am
bg5 wrote:
Thu May 07, 2020 7:17 am
We do contribute to our pensions but its not tax deffered
Technically, I think it is tax-deferred. Do you pay income tax on the money that is contributed to your pension? (I will guess: No.) Will you pay income tax on any future payments of your pension to you in retirement? (I will say: Yes.)
My husband and I both paid into our pensions (different systems) and in neither case was the payment tax deferred.

In fact, when we receive the monthly pensions the taxable part of the pension is reduced slightly to take into account our contributions came from post-tax money. Just the opposite of what you are suggesting.

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Re: Understanding Adjusted Gross Income

Post by bayview » Thu May 07, 2020 1:16 pm

livesoft wrote:
Thu May 07, 2020 8:03 am
bgf wrote:
Thu May 07, 2020 8:00 am
It always boggles my mind how low our effective federal income tax rate is.
And more than 40% of US families don't pay any federal income taxes.
Happened with us this year, my first true retirement year.

I had projected this to happen, but I was still astonished when it did. :D
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