What Are the Best Ways to Reduce Your Adjusted Gross Income (AGI)?

Introduction

Lowering your Adjusted Gross Income (AGI) is a smart tax strategy that can help you qualify for deductions, credits, and lower tax brackets. IRC § 62 defines AGI as gross income minus specific IRS-allowed adjustments. Since many tax benefits phase out based on AGI, reducing it legally can lead to significant tax savings.

This guide outlines the best ways to lower AGI in 2025, helping you minimize taxable income and maximize refunds.

Why Lowering Adjusted Gross Income Matters

Reducing AGI affects:

• Taxable Income – AGI determines how much of your income is taxable.
• Tax Bracket – Lower AGI may place you in a lower tax bracket.
• Eligibility for Tax Credits – Many credits, such as the Child Tax Credit (IRC § 24) and Earned Income Tax Credit (IRC § 32), phase out at higher AGI levels.
• Deductions – AGI impacts itemized deductions, including medical expenses (IRC § 213) and charitable contributions (IRC § 170).
• Medicare Premiums & ACA Subsidies – Lower AGI can reduce Medicare Part B premiums and increase healthcare subsidies under the Affordable Care Act.

Top Strategies to Reduce Your AGI Legally

1. Max Out Contributions to Retirement Accounts

Contributions to traditional retirement accounts lower AGI since they are above-the-line deductions.

• IRA Contribution Limits (2025):
• Up to $7,000 ($8,000 if 50 or older) – IRC § 219
• 401(k) Contribution Limits (2025):
• Up to $23,000 ($30,500 if 50 or older) – IRC § 402(g)
• SEP IRA & Solo 401(k) for Self-Employed:
• Can contribute up to 25% of net earnings, max $69,000

Tax Form: Form 5498 reports IRA contributions.

2. Contribute to a Health Savings Account (HSA)

HSAs allow tax-deductible contributions and grow tax-free if used for medical expenses.

• 2025 Contribution Limits:
• $4,150 for individuals
• $8,300 for families
• $1,000 catch-up for 55+
• HSAs are above-the-line deductions (IRC § 223) and reduce AGI.

Tax Form: Report on Form 8889.

3. Deduct Student Loan Interest

You can deduct up to $2,500 of student loan interest paid in 2025.

• Phase-outs apply based on AGI – IRC § 221.
• Only available if you are legally obligated to pay the loan.

Tax Form: Report on Form 1098-E.

4. Claim Self-Employment Tax Deductions

If you’re self-employed, 50% of self-employment tax is deductible above the line (IRC § 164(f)).

• Other deductible self-employment expenses:
• Home office deduction (IRC § 280A)
• Business mileage deduction ($0.67 per mile for 2025)
• Retirement plan contributions

Tax Forms: Report deductions on Schedule C (Form 1040) and Schedule SE (Form 1040).

5. Make Pre-Tax Contributions to an FSA or Dependent Care Account

• Flexible Spending Account (FSA):
• Contribute up to $3,200 (2025 limit) tax-free for medical expenses.
• Dependent Care FSA:
• Contribute up to $5,000 for childcare expenses, lowering AGI.

6. Deduct Educator Expenses

If you are a K-12 teacher, you can deduct up to $300 per year in classroom supplies ($600 for married educators).

• Above-the-line deduction (IRC § 62(a)(2)(D))
• Keep receipts for verification.

Tax Form: Report on Schedule 1 (Form 1040).

7 . Take Advantage of the Moving Expenses Deduction (Military Only)

Active-duty military members moving due to a military order can deduct moving expenses (IRC § 217).

Tax Form: Report on Form 3903.

8. Deduct Alimony Payments (If Divorce Was Finalized Before 2019)

If your divorce agreement was finalized before December 31, 2018, alimony is deductible above the line (IRC § 215).

Tax Form: Report on Schedule 1 (Form 1040).

9. Utilize Tax-Loss Harvesting

If you sell losing investments, you can offset capital gains and reduce AGI.

• Deduct up to $3,000 per year in losses against ordinary income (IRC § 1211).

Tax Form: Report on Schedule D (Form 1040).

10. Maximize Charitable Contributions (If Itemizing Deductions)

While charitable donations don’t reduce AGI directly, they help lower taxable income.

• Cash donations deductible up to 60% of AGI (IRC § 170).

Tax Form: Report on Schedule A (Form 1040).

Step-by-Step Guide to Reducing AGI

Step 1: Calculate Current AGI

• Find last year’s AGI on Line 11 of Form 1040.
• Add all taxable income sources (W-2, 1099s, rental, business income).

Step 2: Identify Eligible Deductions

• Determine above-the-line deductions you qualify for.
• Gather supporting documents (W-2, 1099, Form 5498, Form 1098-E).

Step 3: Contribute to Tax-Advantaged Accounts

• Increase 401(k), IRA, and HSA contributions before IRS deadlines.
• Adjust employer paycheck withholdings if needed.

Step 4: Report Deductions on Schedule 1 (Form 1040)

• File deductions correctly to ensure compliance.

Step 5: Verify Final AGI Before Filing

• Use tax software or a CPA to confirm calculations.

IRS Forms & Compliance Checklist

• Form 1040, Line 11 – AGI
• Schedule 1 (Form 1040) – Above-the-line deductions
• Schedule C (Form 1040) – Self-employment deductions
• Form 5498 – IRA contributions
• Form 8889 – HSA contributions
• Form 1098-E – Student loan interest deduction

Conclusion

Reducing AGI is a powerful tax strategy that can help lower taxable income and increase tax savings. By maximizing retirement contributions, leveraging tax deductions, and managing investments, you can legally minimize your AGI in 2025.

For expert tax planning, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax professional and IRS representative.

Frequently Asked Questions (FAQs)

1. Does lowering AGI increase my tax refund?
Yes, a lower AGI can help you qualify for tax credits and reduce taxable income, increasing your refund.

2. Can Roth IRA contributions lower AGI?
No, Roth IRA contributions are not tax-deductible, so they do not reduce AGI.

3. Do HSA contributions lower AGI?
Yes, HSA contributions are tax-deductible and directly reduce AGI.

4. Where do I find last year’s AGI?
AGI is listed on Line 11 of last year’s Form 1040.

5. Do capital losses reduce AGI?
Yes, up to $3,000 per year of capital losses can offset ordinary income and lower AGI.