To get our Adjusted Gross Income (Line 37 of our 1040), we get to subtract certain expenses from our Gross Income (Line 22 of our 1040). The expenses we get to deduct is often referred to as items “deducted FOR AGI” or “ABOVE the line deductions”.
Here is what you can subtract (I suggest looking at a 1040 as you read this list! The items in green are more common to us millennials.):
- Line 23) educator expenses up to $250 (applies if you’re a teacher who paid for classroom supplies out of your own pocket)
- Line 24) certain business expenses (this is only for a very select group of people)
- Line 25) HSA contributions (money you put into your Health Savings Account if you have one)
- Line 26) moving expenses (you have to be moving for a new job and it has to be a qualified expense)
- Line 27) half of your self-employment tax if you’re self-employed
- Line 28) contributions to a SEP, SIMPLE or qualified plan (applies only if you’re self-employed)
- Line 29) self-employed health insurance deduction
- Line 30) early withdrawal penalties (like when you get charged for taking money out of a CD before the maturity date)
- Line 31) alimony paid (won’t apply unless you’re divorced)
- Line 32) money you put into your Traditional IRA up to $5,500 in 2013 (your salary has to be within the limits)
- Line 33) money you used to pay for the interest on your student loans up to $2,500. This is part of the reason why student loans are considered “good debt.”
- Line 34) tuition & fees up to $4,000 in 2013.
- Line 35) domestic production activities
You add all those items up and put the total on Line 36 and then subtract Line 36 from Line 22 (your Gross Income). The difference goes on Line 37, which is your AGI.
Your AGI is used for a number of tax calculations. So the lower your AGI, the better.