Money Monday: Tax Triggers


Why Do I Owe Taxes?

Perhaps two of the most asked questions during tax season by clients to prepares are why do I owe taxes or how come my refund is so small?

There are several reasons why people would owe taxes. The most common answer is that they did not have enough taxes withheld from their compensation; they claimed too many dependents, or they did not pay any estimated taxes during the year. But these answers always point you in the direction of paying more so that you can receive a refund.  They don’t show you how to use use the money you would have used to pay more estimated or have more taxes withheld to invest in yourself. Nor do they show you how to  reduce or eliminate any amount you would owe.

Adjusted Gross Income

As you prepare your 2023 taxes, maybe you should consider the two major numbers on your tax return that should be of your greatest concern.  The first is the Adjusted Gross Income (AGI). But what is it and why should you be concerned? Adjusted gross income is where the IRS determines whether you will owe or receive a refund and credits or deductions for which you may qualify. In other words, your AGI is the starting point used to determine your tax liability. Adjusted gross income, as the name implies, starts with your gross income.

Gross income as defined by Section 61 of the Internal Revenue Code ( IRC) includes all income, but never defines income. It then states “from all sources derived.” This is why  when a person is arrested for the criminal offense of selling narcotics, the IRS includes the money earned, and then confiscated by the police as the defendant’s gross income! It is subject to taxes, despite the fact that he or she was selling an illegal substance. Left to the IRS, if it were possible, monies earned from selling on your lemonade stand, or from the tooth fairy would be included in gross income and taxed!

Once you have determined all your income, several adjustments or expenses are subtracted in order to determine your AGI. The list of items which impact your adjusted gross income include tuition fees, certain business expenses, student loan interest, education expenses, penalties for early savings withdrawal, health savings account deductions, self employment health insurance, IRA and self employment retirement plan contributions and half of your self employment taxes. These are all important because the lower you can make your AGI, the more tax credits for which you will qualify.

And in case you didn’t know, a tax credit is more valuable than a tax deduction. Lower AGI makes you more eligible for life learning credits, child tax credit, elderly or disabled tax credit and several others. It also prevents you from being phased out from certain deductions such as mortgage interest premiums, charitable contributions and medical deductions.

Modified Adjusted Gross Income (MAGI)

The first thing you should know about MAGI is that there is no  line on your tax return called MAGI,  unlike AGI which is reflected on line 11 of your IRS Form 1040. So don’t go looking for it! What MAGI does is “add back” deductions taken from your AGI such as student loan interest, tax exempt interest, qualified tuition expenses, rental losses, IRA contributions, foreign income exclusions, one half of self employment tax and more. At this point you are probably saying how can I ever get ahead and lower my AGI or MAGI weight when it comes to taxes?

The answer would be, to make less money; but that would not be realistic! Plus it would not be necessary if you understood that all income is not taxed at the same level or interest rate.

Here are three basic options you can begin to use in addressing this issue.

  1. Increase your health saving account (HSA)contributions;
  2. Make deductible IRA contributions, and
  3. Increase your 401(k)contributions.

This is what I mean when I say, instead of paying more estimated taxes to the IRS, or having more withheld from your income, pay yourself and execute those three options. They will certainly modify your AGI and MAGI without adding back into the calculation.

It’s about understanding how taxes work through conversation and communication with your preparer or accountant so that you can make better choices both now and in the future.


Today’s What’s Up is about credit card payments. Most credit cards have a grace payment in which you will not be charged interest if you pay the balance in full by the due date. The average grace period is 21 days and your grace period renews every month. What you also need to know is that your credit card late fee charges will be capped starting in the next four months at $8 dollars.

While this may be good news for some, it could result in bad news for those who pay their bills on time. Since banks and other lending institutions will no longer be able to charge fees of $30 or more,  they may now either increase interest rates on credit cards, make it more difficult to obtain a credit card or find other ways to earn that lost revenue. The irony here is that most credit card lenders will waive the late fee is you simply call and request a waiver. The solution here is to pay off your entire balance when you charge items on your credit card by the due date. And that’s what’s up!

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