Understanding AGI Limitations & Phase Outs
AGI is the acronym for Adjusted Gross Income. It is generally the sum of a taxpayer's income less adjustments (before deductions and exemptions). Many tax benefits and allowances, such as credits, deductions, exemptions, etc., are limited by a taxpayer's AGI.
Some limits occur at a specific AGI level. For example, your ability to roll a conventional IRA into a Roth IRA is not allowed if your AGI is above $100,000. But, if the AGI is $100,000 or less, the rollover is allowed. This can best be described as a go-or-no-go limitation.
Other limits are based upon a percentage of AGI. Some deductions are reduced by a percentage of AGI until the deduction reaches zero. The two prime examples of this type of percentage limitation are medical itemized deductions (limited by 7.5% of AGI) and miscellaneous itemized deductions (limited by 2% of AGI). Others such as charitable contributions limit the deduction to a percentage of the AGI. Charitable contributions have three AGI limitations depending upon the type of contribution: 50%, 30% and 20%.
Many limitations phase in as the AGI increases between two specific AGI values, thereby "phasing out" (reducing) tax benefit to higher income taxpayers. These phase out levels are inflation adjusted and change every year. To further complicate matters, there are different phase out levels for different filing statuses. Examples of items subject to phase out provisions are:
- Personal Exemptions
- Itemized Deductions
- Education Credits
- Education Interest Deduction
- Active Rental Losses
- Educational IRA Contributions
- Roth IRA Contribution
- Conventional IRA Deduction
- Taxability of Social Security
- Earned Income Credit
Careful tax planning can sometimes avoid or minimize the loss of tax benefits due to AGI limits. If you have advance warning of a large increase in income, it may be appropriate to schedule an appointment to consider alternative approaches to your tax situation.
E Thomas Associates Inc. is a registered investment advisor in Kentucky.
Dave Smith & Tony King are Registered Representatives of and securities are offered through Dalton Strategic Investment Services, Inc., member FINRA & SIPC. 6408 River's Edge Rd, Greenville, OH 45331
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