What is included in your taxable income?

Social Security benefits are included in adjusted gross income (AGI) if your total income, which consists of half of Social Security benefits and other sources of income, exceeds a certain threshold. This can affect the taxation of those benefits and your eligibility for various tax credits and deductions, which in turn can affect your overall tax liability and financial situation. Here’s what you need to know.

A financial advisor can help you optimize your retirement plan to minimize tax liability.

What is adjusted gross income (AGI)?

Your AGI is the total income you report on your tax return after accounting for certain deductions. This includes wages, dividends, capital gains, business income and pension distributions.

This amount serves as the starting point for calculating taxable income and tax liability. Here are four additional uses for AGI:

• Detailed deductions: AGI may affect your eligibility to itemize deductions on your tax return because certain deductions are subject to AGI limitations.

• Tax credits: AGI is used to assess your eligibility for various tax credits, such as the child tax credit, the earned income tax credit, and education tax credits.

• Retirement Account Contributions: AGI affects your ability to contribute to retirement accounts such as traditional IRAs and Roth IRAs. High AGI may limit or eliminate your contributions.

• Medicare premiums: AGI is used to determine the premiums you pay for Medicare Part B and Part D. Higher AGI can lead to higher Medicare premiums.

How to calculate AGI

Here are five key steps to calculating AGI:

• Gather your sources of income: Start by collecting all the sources of income you received during the tax year. These include wages, salaries, self-employment income, interest, dividends and rental income, among other sources of income.

• Note the income exclusions: Exclude certain types of income that are not used to calculate AGI. This can include tax-free interest, qualified distributions from Roth IRAs, and some Social Security benefits.

• Calculate your total income: Add up all sources of income to determine your total income for the year.

• Make deductions across the line: Deduct “above” deductions, also known as income adjustments, from your total income. Common above-the-line deductions include contributions to traditional IRAs, student loan interest, and educator expenses.

• Calculate your AGI: Subtract your total above-the-line deductions from your total income. The result is your AGI. Mathematically, the formula is: AGI = Total Income – Above-the-Line Deductions.

Take note: When you use AGI to determine your taxable income and tax liability, you’ll report AGI on the first page of your federal tax return (Form 1040).

A financial advisor can help you with tax strategy and filing.

Social Security Income and AGI

You will have to pay federal income tax on your Social Security benefits when your income exceeds a certain threshold. This means that if your combined income from Social Security benefits and other taxable income (this includes wages, self-employment, interest and dividends, among other sources that must be reported on your tax return) is above the IRS limit, you could pay taxes up to 85% of your benefits.

The IRS rule for taxes on your Social Security benefits is as follows:

• Individuals filing taxes with a combined income between $25,000 and $34,000 may have to pay income tax on up to 50% of their Social Security benefits. And those with more than $34,000 could be taxed as much as 85 percent.

• Common tax filers with combined income between $32,000 and $44,000 may have to pay income tax on up to 50% of their benefits. And those on more than $44,000 could be taxed as much as 85 percent.

Take note: If you’re married and filing separately, the Social Security Administration says you’ll likely have to pay taxes on your benefits.

Tips for Lowering AGI

Deducting your AGI can help reduce your overall tax liability. Here are three common tax strategies:

• Maximize your retirement contributions: Retirement account contributions can be deducted from total income.

• Find tax deductions: Depending on your situation, there may be a number of tax deductions you are eligible for. These can include student loan interest deductions, medical expense deductions, and property tax deductions, among others.

• Use tax credits: There are also many tax credits you may qualify for. These may include the Earned Income Tax Credit (EITC), Child Tax Credit, Saver’s Credit, and Education Credits, among others.

You may also consider speaking with a financial advisor if you are interested in professional guidance based on your goals.

Conclusion

It’s important to make sure you calculate your AGI accurately because it affects your tax liability, eligibility for tax credits, and other tax-related issues. You can also strategically reduce your AGI to minimize your tax liability and increase your eligibility for some tax credits. Keep track of your income and relevant deductions, and consider consulting a tax professional or using tax software to help with the calculation.

Tips for planning your retirement

• Social Security benefits are just one of the many things you need to prepare for in retirement. A financial advisor can help you create a retirement plan to meet your long-term financial goals, including consideration of potential Social Security benefits. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• You can use a tool like a free retirement calculator to help you estimate whether you’re saving enough for your retirement goals.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/Sladic, ©iStock.com/Surgeon, ©iStock.com/monkeybusinessimages

The post Is Social Security Included in Your AGI? appeared first on SmartReads by SmartAsset.