Introduction
Lowering your Adjusted Gross Income (AGI) can help you qualify for more tax deductions, credits, and benefits, ultimately reducing your overall tax bill. The Internal Revenue Code (IRC) § 62 defines AGI as gross income minus certain adjustments. Since many tax-saving opportunities phase out based on AGI, reducing it legally can lead to significant savings.
This guide outlines effective strategies to lower AGI, including maximizing retirement contributions, leveraging health savings accounts, and deducting eligible expenses.
Why Reducing AGI Matters
Your AGI affects:
- Taxable Income – The lower your AGI, the less income is subject to taxation.
- Eligibility for Tax Credits – Certain credits, like the Child Tax Credit (IRC § 24) and Saver’s Credit (IRC § 25B), phase out based on AGI.
- Deductions and Itemization – AGI determines eligibility for deductions such as medical expenses (IRC § 213) and charitable contributions (IRC § 170).
- Medicare Premiums and ACA Subsidies – Lower AGI can reduce Medicare Part B premiums and increase Affordable Care Act (ACA) healthcare subsidies.
Top Strategies to Lower Your AGI Legally
1. Maximize Contributions to Retirement AccountsContributio
ns to Traditional IRAs and 401(k) plans reduce taxable income.
- IRA Contribution Limit (2025): Up to $7,000 ($8,000 if 50 or older) – IRC § 219
- 401(k) Contribution Limit (2025): Up to $23,000 ($30,500 if 50 or older) – IRC § 402(g)
- Contributions to Solo 401(k) or SEP IRA for self-employed taxpayers can significantly lower AGI.
2. Contribute to a Health Savings Account (HSA)
An HSA allows tax-deductible contributions if you have a high-deductible health plan (HDHP).
- HSA Contribution Limits (2025):
- $4,150 for individuals
- $8,300 for families
- $1,000 catch-up contribution for those 55+
- Contributions are deductible under IRC § 223 and reduce AGI.
3. Deduct Student Loan Interest
You can deduct up to $2,500 in student loan interest payments annually.
- Phase-out limits apply based on AGI – IRC § 221
- Use Form 1098-E from your loan provider to report payments.
4. Claim Self-Employment Deductions
If you’re self-employed, you can reduce AGI by deducting:
- Self-employment tax (50% deductible under IRC § 164(f))
- Home office expenses (IRC § 280A)
- Business mileage and travel expenses
These deductions are reported on Schedule C and Schedule SE (Form 1040).
5. Make Pre-Tax Contributions to an FSA or Dependent Care Account
- Flexible Spending Accounts (FSA): Contribute up to $3,200 (2025 limit) for tax-free healthcare expenses.
- Dependent Care FSA: Contribute up to $5,000 per year for childcare expenses.
These contributions lower AGI and provide immediate tax benefits.
6. Deduct Educator Expenses
If you’re a teacher, you can deduct up to $300 in classroom expenses per eligible educator (IRC § 62(a)(2)(D)). This amount doubles for married educators filing jointly.
7. Take Advantage of Above-the-Line Deductions
Certain deductions directly reduce AGI, including:
- Alimony payments (for pre-2019 divorces) – IRC § 215
- Moving expenses (for active-duty military only) – IRC § 217
- Penalty on early withdrawal of savings – IRC § 165
These deductions are listed on Schedule 1 (Form 1040).
Step-by-Step Guide to Lowering AGI
Step 1: Calculate Current AGI
- Find last year’s AGI on Line 11 of Form 1040.
- Add up all sources of gross income (wages, business income, interest, capital gains, etc.).
Step 2: Identify Eligible Deductions
- Determine which above-the-line deductions apply (IRA, HSA, student loan interest, self-employment expenses, etc.).
- Gather supporting documents (Form W-2, 1099s, Form 1098-E for student loan interest, etc.).
Step 3: Maximize Contributions Before Tax Deadline
- Contribute to retirement plans, HSAs, and FSAs before IRS deadlines.
- Adjust 401(k) or IRA contributions before April 15, 2026, to count for the 2025 tax year.
Step 4: Report Deductions on Schedule 1 (Form 1040)
- Ensure deductions are accurately reported to lower AGI.
- If self-employed, report business-related deductions on Schedule C.
Step 5: Verify Final AGI Before Filing
- Review AGI on Line 11 of Form 1040 before submission.
- Use IRS Free File or tax software to double-check calculations.
IRS Forms & Compliance Checklist
- Form 1040, Line 11 – Report AGI
- Schedule 1 (Form 1040) – List above-the-line deductions
- Schedule C (Form 1040) – Report self-employment income and deductions
- Form 5498 – Report IRA contributions
- Form 8889 – Report HSA contributions
- Form 1098-E – Report student loan interest deduction
Conclusion
Reducing AGI is a key tax planning strategy that can lower your taxable income and increase eligibility for valuable tax credits and deductions. By maximizing retirement savings, leveraging HSAs, deducting eligible expenses, and utilizing tax-deferred accounts, you can legally reduce AGI and minimize your tax liability.
For personalized tax planning, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax expert and IRS representative.
Frequently Asked Questions (FAQs)
1. How does lowering AGI impact my tax refund?
A lower AGI can increase eligibility for tax credits and reduce taxable income, leading to a higher refund or lower tax bill.
2. Does AGI affect my ability to deduct medical expenses?
Yes, you can only deduct medical expenses that exceed 7.5% of AGI. Lowering AGI increases the deductible amount.
3. Can I lower AGI by making a Roth IRA contribution?
No, Roth IRA contributions are not tax-deductible, so they do not reduce AGI. Only Traditional IRA contributions lower AGI.
4. Do capital gains count towards AGI?
Yes, capital gains from investments are included in gross income and impact AGI. Tax-loss harvesting can help offset gains.
5. What’s the deadline to contribute to an IRA or HSA for AGI reduction?
For 2025 taxes, IRA and HSA contributions must be made by April 15, 2026.
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States and an IRS Enrolled Agent (EA). He specializes in tax litigation, cross-border taxation, and IRS compliance, assisting American businesses and Indian expats with IRS matters.
Schedule a consultation today with Anshul Goyal, CPA, for personalized tax planning.