Understanding AGI - One of the Most Impactful Tax Planning Levers On Your Tax Return

Now that tax season has wrapped up, it’s the perfect opportunity to proactively plan for the year ahead.
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To many, "tax planning" simply means piling up as many deductions as possible. But that misses the mark - we should take a step back and think through what we're actually planning for.

What are the key parts of the tax return we should review, project, and try to plan around to create the most impactful tax planning decisions over your lifetime?

Sometimes that leads to strategic uses of deductions and tax deferral, other times that means adding more income in the tax year.
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Understanding key points, or "levers," of your tax return can help you and your professional team uncover opportunities to optimize throughout the year.

The Federal Income Tax Return Formula

Imagine your tax return as a funnel:

• All sources of income flow in,
• Deductions reduce the total,
• Taxable income moves through brackets,
• Credits offset the tax,
• Payments determine whether you owe or receive a refund.

Each step in this funnel provides a chance to evaluate and optimize your tax strategy.

Why Adjusted Gross Income (AGI) Matters

One of the most crucial figures on your tax return is your Adjusted Gross Income (AGI) or, in many cases, a version of Modified Adjusted Gross Income (MAGI).

Your AGI is a gateway number—it determines eligibility for a variety of tax deductions and credits, and whether you're subject to additional taxes.

It's calculated by taking all sources of income and subtracting certain deductions, or adjustments

Key reasons AGI and MAGI matter for optometrists:

🔵 Eligibility for deductions and credits: Deductions reduce taxable income, while credits, like the Child Tax Credit (which phases out starting at $400,000 of AGI), directly offset tax dollar-for-dollar.

If you're trying to itemize deductions using medical expenses, you can only deduct expenses above 7.5% of your AGI - the higher the AGI, the lower amount of expenses you can deduct.

🔵 Affordable Care Act (ACA) premium tax credits: Especially critical for early-stage practice owners, eligibility hinges on your MAGI and the state you're in.

🔵 Roth IRA contributions: Direct contributions to Roth IRAs phase out at MAGI of $230,000 - $240,000 for married couples filing taxes jointly.

🔵 Additional taxes: High AGI can trigger the Net Investment Income Tax (3.8% tax on interest, capital gains, and other investment income) and increased Medicare premiums later in life.

🔵 Student loan repayments: For those with federal student loans, AGI is the default starting point for calculating payments under income-driven repayment plans - effectively a sort of tax to manage.

Practical steps to manage your AGI:

As you talk with your financial planner and tax pro, project the tax year out and ask - what are you phasing out of or into at your AGI level? What do added deductions or income do to impact that?

All things being equal, we'd prioritize deductions that are above the "AGI line" to lower it, rather than below.

If the priority is to lower AGI, examples of "above the line" deductions are:

• Maximize pre-tax retirement contributions (like your 401(k) or a SEP IRA)
• Utilize Health Savings Accounts (HSAs).
• Self-employed health insurance premium deduction, or 1/2 of self-employment taxes.
• Leverage depreciation and other business deductions effectively in your practice.
• Depreciation planning through real estate investments.

This is far from the only planning lever, but AGI is a powerful lever on your tax return.

Resources for you:

• Click HERE to download a guide to the different definitions of "Modified AGI", and what each MAGI definition impacts eligibility for.
• Check out this article I wrote for Independent Strong on Key Tax Planning Levers for Practice Owners
• Listen to the podcast episode below, where I dive deeper into tax planning levers 👇.

Not getting the proactive help you need to plan around this? Now's the time to Click Here to schedule your free Consultation with our firm.

Have a great weekend!

New From our Education Hub

Episode 133: Strategic Tax Planning Levers in the OD's Tax Return I dive into the key tax planning levers every OD should project, review, and plan around - and key questions you and your professional team should be asking. Listen to the Episode!

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