Ways to Lower Your Adjusted Gross Income
Now is a great time to review your finances and plan for 2026 taxes. Taxpayers have opportunities to take advantage of beneficial deductions which can reduce their federal tax liability. Some popular strategies include contributions to certain retirement plans, contributions to health savings accounts (HSAs), and student loan interest deductions.
Retirement Contributions
Contributing to retirement plans has significant tax benefits, including the ability to deduct contributions and achieve long-term tax-deferred growth. Below are three types of deductible retirement plans:
- Traditional IRAs – Contributions are deductible within certain AGI limits and earnings on contributions are tax-deferred. The money invested into traditional IRA plans and earnings on those investments are tax-deferred until distributed.
- Simplified Employee Pension Plan (SEP) IRA – This is a type of IRA for self-employed workers or small business owners which allows the employer to make contributions for their employees (including themselves). These contributions are deducted from their AGI and excluded from the gross income of the employees. Earnings are not taxable until withdrawn, and SEP IRAs have the benefit of higher contribution limits compared to traditional IRAs.
- Savings Incentive Match Plan for Employees (SIMPLE) IRA – SIMPLE IRAs are less complex than traditional or SEP IRAs and designed for self-employed individuals and their employees. The benefits are contributions are excluded from federal income tax, not subject to withholdings, tax deductible, and grow tax-deferred until the owner begins making withdrawals in retirement.
Health Savings Account (HSA)
Health savings accounts are offered for individuals with high deductible health plans and are funded by the individual and/or their employer. Contributions made are excluded from income and distributions are tax-free, so long as they are designated for qualified medical expenses. The benefits of utilizing an HSA include:
- Taxpayers can claim a deduction for contributions (made personally or by someone other than the employer) even if they don’t itemize their deductions
- Contributions made by the employer can be excluded from the taxpayer’s gross income
- Contributions remain in the account and grow tax-free until they are used
Student Loan Interest Deduction
Interest paid by a taxpayer for qualified education loans is deductible from gross income for qualifying individuals who meet the AGI limit. The student loans must be for qualified higher education expenses and the interest has a maximum deduction of $2,500 annually. Qualified student loans are those incurred solely to pay qualified education expenses that are:
- Incurred on behalf of the taxpayer, their spouse, or a dependent as of the time of the loans;
- Paid or incurred within a reasonable amount of time before or after the loans are incurred; and
- Attributable to education furnished during a period when the recipient was an eligible student
Contact Us
If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.