What is Adjusted Gross Income (AGI)

What is Adjusted Gross Income (AGI)

by | Jan 5, 2018 | Investment & Income

What is Adjusted Gross Income (AGI)

Most of us have come across the term Adjusted Gross Income or AGI and know that it has got something to do with taxes. But what is it exactly and how it impacts your financial life is what we are going to look into today. The simplest definition of AGI is that it is a number that the IRS look at closely so as to determine your tax liabilities.

Behind the Scenes

AGI or Adjusted Gross Income is calculated after adding up all of your verified and qualified income and then detracting all the deductions from the same. Thus, a lower AGI is what one must aim for, as it lets you benefit from lower tax bills along with the ability to qualify for tax benefits. Now that we know it can help us reduce the taxes, how is it exactly calculated?

  • You should start off with determining your Gross income. Essentially, the total amount of money that you pocketed during a specific year.
  • It usually includes salary, wage, rent from property, capital gains, any form of royalties, social security benefits that are taxable.
  • You need to deduct various contributions from it and thus you achieve on the AGI.
  • Deductions or contributions such as contribution towards retirement, interest amount paid for education loans, educator expenses incurred some of the medical expenses, health insurance premiums etc. qualify for this.

Should you be bothered?

Adjusted Gross Income is one of the most critical values when it comes to taxes for a particular financial year. You might have come across the term net income, which is nothing but a synonym for adjusted gross income. Why so? Well, because it is the net amount on which all the taxes are calculated, once the income and deductions are looked after. This is one of the main reasons behind the adjusted gross income being featured in the first page of Form 1040 and Form 1040A as provided by theIRS.  Another term that comes into the foray of discussion is Modified Adjusted Gross Income or MAGI. MAGI adds a few of the deduction types back and helps the IRS determine your eligibility for some the initiatives. Here is why you should have a faint grasp of both.

  • Understanding the MAGI helps you figure out if or not you qualify for the Roth IRA contributions. If your income crosses a certain limit, then you cannot invest in Roth IRA.
  • Certain contributions such as HSA or funds towards 401(k) at work place will help you reduce your MAGI and thus make you eligible for some of the tax benefits.
  • Another example would be you holding on to some stocks for quite some time before selling them. This would push your MAGI and in turn making you not eligible for certain tax cuts. Knowing your MAGI earlier would have prevented this.
  • If you are someone who likes to do charity and keep a track of it, knowing your AGI becomes even more crucial. If your AGI is above the expected limits, then keeping track or documenting these charities would be of no use. It of course shouldn’t stop you from charity.
  • For individuals who are retirees, withdrawing IRA without checking the AGI can result in higher taxation.

One cannot emphasize enough on the importance of tax planning in advance. It not only helps you have a worry-free end of the year but also plan for missed opportunities like the ones mentioned above. Understanding AGI and even MAGI is the first step towards a successful tax plan.

Best Investments for Boosting Your Tax Refund

Best Investments for Boosting Your Tax Refund

by | Oct 24, 2017 | Investment & Income, Tax Refund

Best Investments for Boosting Your Tax Refund

If you go by history or statistics a large number of taxpayers will receive tax refunds. Take the year 2015 for an example, where about 80% of taxpayers received refunds of $3000 or more. Consider that the 80% is out of a total of 150 million individuals. You would certainly want to be in that 80% and even push for higher refunds. We will take a look at some of the best investment tools. These would not only boost your portfolio but also help you bag bigger tax refunds.

Where to invest?

Retirement planning comes to your rescue when it getting better tax refunds is your concern. Simply because they have the capabilities of boosting up your refunds. We all are aware of IRA or Individual Retirement Account, but what most of us are not aware of, is that it provides double benefits when it comes to taxation.

Not only does IRA allow deductions till a certain limit, but also can help you get refunds if your income is within an acceptable limit.

Using a traditional IRA you can avail deductions up to $5500 and up to $6500 if your age is 50 and above.

You can opt for the Retirement Savings Contribution Credit, under which you stand to get tax credits of up to $1000 if filing as an individual or $2000 if married filing jointly. You just need to figure out if you qualify for the credits or not. If you do, do not hesitate to open a traditional IRA and claim tax credits.

A lot of individuals invest their money is Roth IRAs. Things pan out a bit differently in this case, as you cannot deduct your investments using Roth IRA. However, investments in Roth IRA are eligible for Retirement Savings Contribution Credit.

Other investments for tax credits

Investing in Roth IRA or traditional IRA gives you the opportunity to increase your tax refunds provided your income is within certain limits, we will discuss those limits later on. But there are other forms of investments as well, with which you can benefit from the Retirement Savings Contribution Credit.

401(k)

We generally know 401(k) as the retirement plan that an employer sponsors. Apart from the employer’s contribution, you also contribute for the same before taxes. With 401(k) you have the control over the investments. You can choose from mutual funds, bonds, stocks and some other market instruments. The most popular ones being target date funds, which eventually become low risk as you near your retirement. Money that you invest in 401(k) is also eligible for Retirement Savings Contribution Credit.

403(b)

The 403(b) is a retirement plan which is applicable for a limited audience, namely educational institutions and certain non-profit organizations. The plan is tax deferred in nature, meaning they are nontaxable till they grow (usually till retirement). Once you withdraw them post retirement, normal taxation is applicable to them. Investment in 403(b) also qualifies for the Saver’s tax credit.

SARSEP

Companies that have an employee base of 25 or fewer, can avail the SARSEP or Salary Reduction Simplified Employee Pension Plan. With the plan, employees can invest pre-taxed money to their IRA as part of their salary deductions. SARSEP also qualifies for Saver’s tax credit.

One of the best ways for boosting your tax refunds is to look out for eligibility of different tax credits.

There is, however, a small caveat to that piece, you need to be in the low to medium income range to benefit from most of the tax credits if not all. The upper cap for income levels for various categories are:

  • $30750 for single filers
  • $46125 for head of households
  • $61500 for married filing jointly

If you are within these income limits, the above mentioned investments can boost up your tax refunds substantially.

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What about Gifts from Foreigners in your Tax Returns?

What about Gifts from Foreigners in your Tax Returns?

by | May 29, 2015 | Investment & Income

What about Gifts from Foreigners in your Tax Returns?

December is a time when we think of gifts, both giving and receiving them. If you are a U.S. person who received foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required.

General Rule: Foreign Gifts

In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a non-resident alien individual or foreign corporation, partnership or estate.

The IRS may re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons.

A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.

Reporting Requirements

You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest. Include on Form 3520:

  • Gifts or bequests valued at more than $100,000 from a non-resident alien individual or foreign estate (including foreign persons related to that non-resident alien individual or foreign estate);

or

  • Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).

You must aggregate gifts received from related parties. For example, if you receive $60,000 from non-resident alien A and $50,000 from non-resident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520.

File Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year. See the Instructions for Form 3520 for additional information. Under a new law effective June 17, 2008, gifts from individuals who ceased to be a U.S. citizens or green card holders (lawful permanent residents) on or after June 17, 2008 may be subject to special rules. Refer to the 2008 Instructions for Form 3520 for additional information.

Penalties for Failure to File Form 3520

You may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate. Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).