What Are AGI Limitations on Tax Deductions and Credits?

An Adjusted Gross Income (AGI) limitation is a threshold set by the IRS that determines eligibility for certain tax benefits. As your income rises past specific AGI levels, the amount you can deduct or the credit you can claim may be reduced or eliminated entirely. This figure directly influences your final tax liability.

Understanding Adjusted Gross Income

Gross income is the starting point for calculating your taxes and includes all income you receive that is not exempt from taxation. This encompasses wages, salaries, bonuses, dividends, capital gains, and retirement distributions. From this total, you subtract specific “above-the-line” deductions, listed on Schedule 1 of IRS Form 1040, to arrive at your Adjusted Gross Income. These adjustments can be claimed even if you do not itemize and are the basis for calculating limitations on other tax benefits.

Itemized Deductions Subject to AGI Limits

After calculating AGI, taxpayers choose between taking the standard deduction or itemizing deductions on Schedule A. Itemized deductions are called “below-the-line” deductions because they are subtracted from your AGI to determine your taxable income. Several of these deductions are restricted by AGI-based thresholds, meaning you can only deduct expenses that exceed a certain percentage of your AGI.

The medical expense deduction serves as a clear example. Taxpayers can only deduct the amount of unreimbursed medical and dental expenses that exceeds 7.5% of their AGI. If your AGI is $80,000, the first $6,000 of your medical expenses is not deductible; if you incurred $10,000 in costs, you could only deduct $4,000.

For cash donations to most public charities, the deduction is limited to 60% of your AGI. A person with an AGI of $100,000 can deduct up to $60,000 in cash contributions, and different limits apply to donations of property. If you donate more than the allowed percentage, you can often carry the excess amount forward to deduct in future tax years.

Personal casualty and theft losses are another category constrained by AGI. To be deductible, these losses must occur in a federally declared disaster area. The calculation requires you to first reduce the loss by any insurance reimbursement, then subtract $100 per casualty event. Finally, you can only deduct the amount of the remaining loss that exceeds 10% of your AGI.

Tax Credits Subject to AGI Limits

While deductions reduce your taxable income, tax credits provide a dollar-for-dollar reduction of your tax liability. Many credits are subject to income limitations based on Modified Adjusted Gross Income (MAGI). MAGI is calculated by taking your AGI and adding back certain deductions, like student loan interest. As your MAGI increases, the value of these credits is reduced through a “phase-out” until it is eliminated.

The Child Tax Credit, worth up to $2,000 per qualifying child for the 2024 tax year, begins to phase out for taxpayers with a MAGI above $200,000 ($400,000 for married filing jointly). For example, a single filer with one child and a MAGI of $205,400 would see their credit reduced by $300 ($50 for each of the six $1,000 increments over the threshold), resulting in a credit of $1,700.

Higher education credits also have MAGI-based phase-outs. The American Opportunity Tax Credit (AOTC), a credit of up to $2,500 per student, begins to phase out for single filers with a MAGI between $80,000 and $90,000 ($160,000 to $180,000 for joint filers) for 2024. The Lifetime Learning Credit (LLC), a nonrefundable credit of up to $2,000 per return, uses the same MAGI phase-out ranges.

The Child and Dependent Care Credit helps cover expenses for the care of a child under 13 or a dependent unable to care for themselves. The credit is calculated as a percentage of your work-related expenses, up to $3,000 for one qualifying individual and $6,000 for two or more. The percentage starts at 35% for an AGI of $15,000 or less and drops to 20% for an AGI over $43,000.

Strategies for Managing Your AGI

Managing your AGI is a key financial strategy, as a lower AGI can help you qualify for more deductions and credits. Maximizing your use of “above-the-line” deductions is the most direct way to lower your AGI. These adjustments reduce your AGI before other limitations are calculated.

Common strategies for lowering your AGI include:

• Retirement Account Contributions: Money contributed to a traditional 401(k) is excluded from your gross income, lowering your AGI. For 2025, the contribution limit is $23,500, with a $7,500 catch-up for those age 50 and over. Deductible contributions to a traditional IRA also reduce AGI, with a 2025 limit of $7,000, or $8,000 if you are age 50 or over.
• Health Savings Account (HSA) Contributions: If covered by a high-deductible health plan, you can make tax-deductible contributions to an HSA. For 2025, the limits are $4,300 for self-only coverage and $8,550 for family coverage, with a $1,000 catch-up for those 55 or older.
• Student Loan Interest: You can deduct up to $2,500 per year in interest paid on student loans.
• Educator Expenses: Eligible K-12 educators can deduct up to $300 of unreimbursed business expenses.
• Self-Employment Deductions: Self-employed individuals can deduct business expenses, which reduces net business income and, in turn, AGI. Other deductions include one-half of self-employment taxes and premiums paid for health insurance. They can also establish and contribute to retirement plans like a SEP IRA or Solo 401(k).