Managing AGI could protect tax breaks

Posted on Sep 29, 2015

How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions. Knowing how close you are to the “edge” can help preserve tax breaks for 2015.

Many phase-outs are based on modified adjusted gross income, or MAGI. MAGI is the adjusted gross income shown on your tax return as “modified” by adding back certain deductions. The “add-backs” vary with specific phase-outs. That means you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying rules differ – including the MAGI threshold.

Here are some common federal tax benefits with MAGI phase-outs.

  • Education credits. The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 if you’re married filing jointly ($80,000 if you’re single). The credit disappears completely when your MAGI is greater than $180,000 for joint returns ($90,000 if your filing status is single).

For 2015, the Lifetime Learning Credit begins to phase out at $110,000 when you’re married filing a joint return and $55,000 when you’re single. Once your MAGI reaches $130,000 (married) or $65,000 (single), the credit is no longer available.

  • Retirement plans. Phase-outs affect retirement planning too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer’s plan and your MAGI exceeds $98,000 ($61,000 when you’re single).

While Roth IRA contributions are not tax-deductible, the amount you can contribute for 2015 begins to phase out when your MAGI reaches $183,000 and you’re married filing jointly ($116,000 if you’re single).

In addition, the federal “saver’s” credit for contributing to retirement plans phases out when your 2015 MAGI is more than $61,000 and your filing status is married filing jointly ($30,500 for singles).

  • Other phase-outs. The phase-out for the exclusion of social security benefits from taxable income is calculated on the amount of your MAGI over the base amount of $32,000 when you’re married filing jointly. The base amount is $25,000 when you’re single.

Phase-outs also reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.

Contact our office for guidance in managing your income for maximum tax breaks.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in the McLean and Tysons Corner, VA. Gilliland & Associates specializes known for our superior knowledge and aggressive interpretation and application of tax laws, we help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

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