Steps to Cut Your Tax Bill

Dec. 12, 2007 — -- Last week, I advised readers to buy their tax preparation software now to help with year-end tax planning and lessen how much they owe the federal government in the spring.

One reason this purchase now is a good idea is that tax preparation software can make it easier to calculate your likely adjusted gross income for this year. Your adjusted gross income, or AGI, may be the most important figure on your personal tax return. AGI is used as the benchmark to determine your eligibility for a whole host of tax breaks, everything from tuition credits to medical expense deductions.

Once your AGI surpasses certain thresholds, your eligibility begins to phase out until it is eliminated entirely.

Located at the bottom of the first page on your federal tax return, adjusted gross income essentially is your total income from wages, investments, business profits and other sources minus certain adjustments.

Sometimes you might hear tax professionals talk about "above-the-line" or "below-the-line" deductions. The line they're talking about is the one just above adjusted gross income. Above-the-line deductions are considered particularly valuable because you do not need to itemize to claim these and they lower your AGI, thus increasing your eligibility for other tax breaks.

The bottom line is that knowing your AGI for the year will allow you to do a better job of tax planning and find ways to save you and your family money.

In that spirit, I've come up with a list I call "Five Reasons to Know Your AGI." It highlights tax breaks that are based upon your AGI. In some cases, the break is based on modified AGI, which generally is adjusted gross income increased by certain items. All figures are for 2007 as these numbers often are indexed for inflation.

For simplicity's sake, I include the AGI phase-out figures for married couples filing jointly and single persons. The limits for those classified as married filing separately and head of household may be different, depending upon the particular tax item.