Tax Adjustments That Can Lower Your Taxable Income

Tax adjustments are methods taxpayers can use to legally reduce their total taxable income. This article explores the primary ways to lower your tax obligation, covering adjustments that reduce gross income, deductions taken after your initial income is calculated, and tax credits that directly decrease your final tax bill. It also outlines the process for correcting a tax return if you discover an error after filing.

Above-the-Line Adjustments to Reduce Gross Income

The first step in calculating your tax liability is determining your Adjusted Gross Income (AGI). AGI is calculated by taking your gross income and subtracting specific expenses known as “above-the-line” adjustments, which are listed on Schedule 1 of Form 1040. A lower AGI reduces your taxable income and can increase your eligibility for certain tax credits and deductions.

These adjustments are valuable because you can claim them even if you do not itemize deductions. Common examples include contributions to retirement accounts, health savings accounts, student loan interest, and certain educator expenses. Self-employed individuals can also deduct one-half of their self-employment taxes.

Traditional IRA Deduction

Contributions to a traditional Individual Retirement Arrangement (IRA) can lower your taxable income. For 2025, you can contribute up to $7,000 if you are under age 50, or $8,000 if you are age 50 or older. The amount you can deduct depends on whether you or your spouse are covered by a retirement plan at work and your modified adjusted gross income (MAGI).

If you are not covered by a workplace retirement plan, you can deduct your full contribution. If you are covered, your deduction may be limited. For 2025, the deduction for single filers phases out with a MAGI between $79,000 and $89,000. For married couples filing jointly where the contributing spouse is in a workplace plan, the phase-out range is $126,000 to $146,000.

Health Savings Account (HSA) Deduction

A Health Savings Account (HSA) offers a triple tax advantage: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP).

For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and older can contribute an additional $1,000. These contributions are reported on Form 8889, and the deductible amount is entered on Schedule 1 of Form 1040.

Student Loan Interest Deduction

Taxpayers who paid interest on a qualified student loan can deduct the amount paid, up to a maximum of $2,500. The deduction is reduced and eventually eliminated based on your MAGI.

For 2025, the phase-out for single filers is a MAGI between $85,000 and $100,000. For married couples filing jointly, the phase-out range is between $170,000 and $200,000. Your lender will send Form 1098-E showing the amount of interest you paid.

Educator Expenses

Eligible educators can deduct up to $300 of unreimbursed business expenses for items like books, supplies, and professional development courses. If two eligible educators are married filing jointly, they can deduct up to $600, with a maximum of $300 per spouse. An eligible educator is a K-12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during the school year.

Below-the-Line Deductions

After calculating your AGI, you can reduce it further by taking either the standard deduction or itemizing your deductions. These are called “below-the-line” deductions because they are subtracted after the AGI is calculated. You should select the method that results in a larger deduction, which lowers your tax liability.

The standard deduction is a fixed dollar amount based on your filing status, age, and whether you are blind. For 2025, the standard deduction is $15,000 for single filers, $30,000 for married couples filing jointly, and $22,500 for heads of household. An additional amount is available for taxpayers who are age 65 or older or are blind.

Alternatively, you can itemize deductions by listing specific expenses on Schedule A of Form 1040. If your total eligible itemized expenses exceed your standard deduction, it is advantageous to itemize. The main categories for itemized deductions are medical expenses, state and local taxes, home mortgage interest, and charitable contributions.

Medical and Dental Expenses

You can deduct the portion of your medical and dental expenses that exceeds 7.5% of your AGI. This high threshold means only those with substantial medical costs will likely benefit. Qualifying expenses include payments for the diagnosis, cure, treatment, or prevention of disease, such as payments to doctors, dentists, and surgeons. The cost of prescription drugs, insulin, medical insurance premiums, and transportation to medical care are also deductible.

State and Local Taxes (SALT)

The state and local tax (SALT) deduction allows you to deduct certain taxes paid to state and local governments. You can choose to deduct either state and local income taxes or general sales taxes, but not both. The deduction can also include state and local real estate and personal property taxes. The total amount you can claim for all state and local taxes combined is capped at $10,000 per household per year, or $5,000 if married filing separately.

Home Mortgage Interest

Homeowners can deduct the interest paid on mortgage debt used to buy, build, or improve a primary or second home. The deduction is limited to the interest on a total mortgage debt of up to $750,000, or $375,000 if married filing separately. Your lender will send you Form 1098 showing the mortgage interest you paid. You may also be able to deduct points paid on the loan and mortgage insurance premiums, subject to income limits.

Charitable Contributions

Donations to qualified charitable organizations can be deducted if you itemize. Qualified organizations include churches, hospitals, and nonprofits with 501(c)(3) status, but not individuals or political campaigns. For cash contributions, you need a bank record or written proof from the charity. For non-cash contributions over $500, you must file Form 8283. The amount you can deduct is based on a percentage of your AGI; for most public charities, you can deduct cash contributions up to 60% of your AGI.

Tax Credits That Directly Reduce Your Tax Bill

Unlike deductions, which lower your taxable income, tax credits reduce your tax liability on a dollar-for-dollar basis. A $1,000 tax credit reduces your tax bill by the full $1,000. Tax credits are categorized as either nonrefundable or refundable. The distinction is important as it determines how the credit is applied and whether you can receive any part of it back as a refund.

Nonrefundable Credits

A nonrefundable tax credit can reduce your tax liability to zero, but you cannot get any portion back as a refund. If the credit is larger than the tax you owe, the unused portion is lost. For example, if you owe $500 in taxes and have a $1,000 nonrefundable credit, your tax bill is eliminated, but you do not receive the remaining $500.

One common nonrefundable credit is the Child and Dependent Care Credit. This helps cover care costs for a qualifying child under 13 or a dependent incapable of self-care, allowing you to work. The credit is a percentage of your expenses, with a maximum of up to $2,100 for two or more qualifying individuals.

Another nonrefundable credit is the Lifetime Learning Credit (LLC), for qualified tuition and expenses for courses to acquire job skills. The credit is worth up to $2,000 per tax return. It is phased out for taxpayers with a MAGI between $80,000 and $90,000, or $160,000 and $180,000 for joint returns.

Refundable Credits

Refundable tax credits are paid out in full, even if the credit amount exceeds your total tax liability. If the credit is more than the tax you owe, the difference is issued as a tax refund. This means you can benefit from a refundable credit even with no tax liability.

The Earned Income Tax Credit (EITC) is a refundable credit for low- to moderate-income working individuals, especially those with children. The credit amount depends on income, filing status, and number of qualifying children. For 2025, the maximum EITC for a taxpayer with three or more qualifying children is $8,046.

Other credits are partially refundable. The Child Tax Credit is worth up to $2,000 per child for 2025, with up to $1,700 per child being refundable as the Additional Child Tax Credit. The American Opportunity Tax Credit (AOTC) provides a maximum annual credit of $2,500 for higher education expenses, with up to $1,000 of it being refundable.

Correcting a Return with Form 1040-X

If you discover a mistake on a filed tax return, you can make corrections using Form 1040-X, Amended U.S. Individual Income Tax Return. You can use this form to change your filing status, correct income, or adjust deductions or credits. You have three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, to file an amended return and claim a refund.

Preparation

Before filling out Form 1040-X, gather your original tax return and any new or corrected documents, such as W-2s or 1099s. The form has three columns: Column A for original figures, Column B for corrected amounts, and Column C for the net change. You will transfer the figures from your original return to Column A and enter the corrected figures in Column B.

In Part III, “Explanation of Changes,” you must provide a clear written explanation for each change. This helps the IRS understand the reason for the amendment and process it correctly.

Procedural Action

You can e-file Form 1040-X for recent tax years using approved tax software. If filing a paper return, mail the form and attach copies of any new or corrected forms or schedules that support the changes; do not attach your original return. If the amended return shows you owe more tax, pay the additional amount as soon as possible to minimize interest and penalties.

You can pay online, by phone, or by mail. After submitting, you can track its status using the “Where’s My Amended Return?” tool on the IRS website. Processing an amended return can take up to 20 weeks or longer.