How to Lower Your Adjusted Gross Income

Adjusted Gross Income (AGI) is a foundational figure on a tax return, influencing an individual’s tax situation. This amount is derived by taking gross income and subtracting specific “above-the-line” deductions. AGI determines eligibility for various tax credits, deductions, and income-based programs. A lower AGI can lead to a reduced tax burden and increased access to valuable tax benefits.

Contributions to Tax-Advantaged Accounts

Contributing to certain tax-advantaged accounts offers a direct method to reduce Adjusted Gross Income. These accounts are designed to encourage saving for retirement and healthcare by providing immediate tax benefits.

Traditional Individual Retirement Arrangements (IRAs) allow individuals to make tax-deductible contributions in the year they are made, which directly lowers taxable income and AGI. For 2025, individuals under age 50 can contribute up to $7,000, while those age 50 and over can contribute an additional $1,000, totaling $8,000. The deductibility of these contributions depends on whether an individual is covered by a retirement plan at work and their Modified Adjusted Gross Income (MAGI). For instance, in 2025, if covered by a workplace plan, the deduction may be phased out for single filers with MAGI between $79,000 and $89,000, and eliminated entirely at $89,000 or more.

Health Savings Accounts (HSAs) provide another avenue for AGI reduction, serving as tax-advantaged savings accounts specifically for healthcare expenses. To be eligible, an individual must be covered by a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage, with maximum out-of-pocket expenses not exceeding $8,300 for self-only or $16,600 for family coverage. Contributions to an HSA are tax-deductible, reducing AGI, and for 2025, the limits are $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and over can contribute an additional $1,000 as a catch-up contribution.

Self-Employed Retirement Plans, such as SEP IRAs and SIMPLE IRAs, offer AGI reduction opportunities for self-employed individuals and small business owners. Contributions made to a SEP IRA are deductible and reduce AGI, with the 2025 limit being the lesser of 25% of compensation or $70,000. For SIMPLE IRAs, the employee contribution limit for 2025 is $16,500, with an additional $3,500 catch-up contribution for those age 50 and over, bringing the total to $20,000. Employer contributions to these plans are also deductible.

Deductible Expenses and Other Adjustments

Beyond contributions to tax-advantaged accounts, several other “above-the-line” deductions can directly reduce AGI. These adjustments to income can be claimed regardless of whether an individual itemizes deductions or takes the standard deduction.

The Student Loan Interest Deduction allows eligible taxpayers to deduct a certain amount of interest paid on qualified student loans. For 2025, the maximum deduction is $2,500. However, this deduction is subject to income limitations, with a phase-out for single filers in 2025 when their Modified Adjusted Gross Income (MAGI) is between $85,000 and $100,000, and for those married filing jointly with MAGI between $170,000 and $200,000. To qualify, the loan must have been used for qualified education expenses, and the taxpayer must be legally obligated to pay the interest.

Self-employed individuals can also reduce their AGI by deducting half of the self-employment taxes paid. Self-employment tax covers Social Security and Medicare taxes for those who work for themselves. This deduction acknowledges that self-employed individuals pay both the employer and employee portions of these taxes, allowing them to deduct the employer-equivalent portion as an adjustment to income.

Educators who pay for unreimbursed ordinary and necessary expenses related to their job may qualify for the Educator Expenses deduction. This applies to teachers, instructors, counselors, principals, or aides working at least 900 hours in a K-12 school. For 2025, the maximum deduction is $300, and if two married educators file jointly, they can deduct up to $600, with no more than $300 per person. Qualified expenses include books, supplies, other classroom materials, and professional development courses.

For divorce or separation agreements executed before 2019, alimony payments made by a taxpayer were deductible as an adjustment to income. This deduction does not apply to agreements made after December 31, 2018. The change in tax law means that alimony payments under newer agreements are neither deductible by the payer nor taxable to the recipient.

If an individual incurs a penalty for early withdrawal from a certificate of deposit (CD) or similar time deposit account, the amount of that penalty can be deducted as an adjustment to income. This deduction is allowed even if the interest earned on the account is less than the penalty amount.

Certain business expenses for specific professions also qualify as “above-the-line” deductions. These include unreimbursed business expenses of reservists of the Armed Forces, qualified performing artists, and fee-basis government officials. While these deductions apply to a smaller subset of taxpayers, they offer a direct reduction to AGI for those who meet the specific criteria for their profession.