How to Lower Your Adjusted Gross Income

Adjusted Gross Income, or AGI, represents your total income from all sources minus specific, allowable deductions. This figure, found on line 11 of Form 1040, is calculated before standard or itemized deductions, making it distinct from your total gross earnings and final taxable income. AGI is important because it serves as the income threshold for many tax credits and deductions. A lower AGI can unlock eligibility for these benefits and lead to tax savings. This article explores strategies to reduce your AGI using “above-the-line” deductions, which are subtracted from your gross income.

Maximizing Retirement Plan Contributions

Making pre-tax contributions to retirement accounts is a direct way to reduce your Adjusted Gross Income. For individuals with an employer-sponsored plan like a 401(k), 403(b), or Thrift Savings Plan (TSP), contributions are taken from your paycheck before federal and state income taxes are calculated. This process lowers the income reported in Box 1 of your Form W-2.

For 2025, the maximum employee contribution to these plans is $23,500. Individuals age 50 and over can make an additional “catch-up” contribution of $7,500, and a higher catch-up limit of $11,250 applies to those aged 60 through 63.

Another way to lower AGI is by deducting contributions to a Traditional Individual Retirement Arrangement (IRA) on Schedule 1 of Form 1040. For 2025, you can contribute up to $7,000 to an IRA, or $8,000 if you are age 50 or older. The deductibility of these contributions depends on your income and whether you are covered by a retirement plan at work.

If you are not covered by a workplace plan, you can deduct your full contribution. If you are covered, the deduction is subject to income phase-outs. For 2025, the phase-out range is $79,000 to $89,000 for single filers and $126,000 to $146,000 for married couples filing jointly.

Utilizing Health Savings Accounts

A Health Savings Account (HSA) offers a method for reducing your AGI while setting aside funds for medical costs. The main requirement for contributing to an HSA is enrollment in a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage.

An HSA provides a triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This deduction is available whether you contribute through payroll or directly to an HSA provider, and you do not need to itemize to claim it.

For 2025, the contribution limit for an HSA is $4,300 for individuals with self-only HDHP coverage and $8,550 for those with family coverage. These limits apply to the combined contributions from both you and your employer.

Individuals age 55 or older can make an additional “catch-up” contribution of $1,000 per year. If both spouses are over 55, each can make their own $1,000 catch-up contribution into separate HSA accounts. Maximizing these contributions not only prepares you for future healthcare expenses but also provides an immediate reduction in your current-year AGI.

Key Deductions for Self-Employed Individuals

Individuals who work for themselves have access to several “above-the-line” deductions that lower their Adjusted Gross Income. A major deduction is for one-half of their self-employment taxes, which consist of Social Security and Medicare taxes. Since self-employed individuals pay both the employee and employer portions, the IRS allows them to deduct the employer-equivalent portion on Schedule 1 of Form 1040.

Self-employed individuals can also deduct 100% of the premiums paid for medical, dental, and qualified long-term care insurance for themselves and their family. This deduction requires that the individual is not eligible to participate in an employer-sponsored health plan, including one from a spouse’s employer. The deduction cannot exceed the net profit from the business.

Self-employed individuals can also lower their AGI by contributing to specialized retirement plans. A Simplified Employee Pension (SEP) IRA allows contributions up to 25% of net adjusted self-employment income, not to exceed $70,000. A SIMPLE IRA requires smaller contributions but is often easier to administer, allowing for employee and required employer contributions. A Solo 401(k) allows an individual to contribute as both the “employee” and “employer,” permitting an employee contribution up to the standard limit, plus an “employer” profit-sharing contribution, subject to overall limits.

Education and Other Above-the-Line Deductions

Other specific deductions can lower your Adjusted Gross Income, including the student loan interest deduction. Taxpayers who paid interest on a qualified student loan can deduct the amount paid during the year, up to $2,500. This deduction is claimed as an adjustment to income, so you do not need to itemize to benefit from it. The deduction is gradually phased out based on your modified AGI; for 2025, the phase-out range is $85,000 to $100,000 for single filers and $170,000 to $200,000 for married couples filing jointly.

Eligible educators can take the educator expense deduction. This allows K-12 teachers, counselors, or aides who work at least 900 hours in a school year to deduct up to $300 of unreimbursed business expenses like books and supplies. If two eligible educators are married and file a joint return, they can deduct up to $600, but not more than $300 each.

A few specialized deductions also exist. The payer of alimony can deduct payments if the divorce or separation agreement was executed on or before December 31, 2018, but this is not available for newer agreements. Additionally, active-duty members of the Armed Forces can deduct certain moving expenses for a permanent change of station.

Investment Strategies to Reduce Income

Investment management techniques can also serve to lower your Adjusted Gross Income, primarily through tax-loss harvesting. This strategy involves selling investments at a loss to offset capital gains from other investments sold for a profit. IRS rules require that short-term losses first offset short-term gains, and long-term losses first offset long-term gains, before being applied across categories. This process of netting gains and losses can significantly reduce the amount of taxable investment income that flows into your AGI.

If your total capital losses exceed your total capital gains, you can use up to $3,000 of the excess loss to lower your other income, such as wages. Any remaining net capital loss beyond the $3,000 limit can be carried forward to future tax years.

When using this strategy, be aware of the “wash-sale rule.” This rule prevents you from claiming a loss on a security if you buy a “substantially identical” one within 30 days before or after the sale. Violating this rule disallows the loss for the current year and instead adds it to the cost basis of the new investment.