We study anatomy to identify parts of the human body. We study physiology in order to understand how these human parts work together, for example, they find and digest food, they breed and pay taxes. This simple approach to research is the foundation of modern medicine and, for the most part, the basis for most of us living in a healthy and productive life. We can apply the same approach to research for personal federal income taxes; we need to first classify parts of the federal tax return, and then examine how the parts work together to reach one end; how much you owe taxes. Every year and with changes to the Income Tax Code, your life is more and more like working at home. There is no valid disagreement that paying our tax share is undoubtedly a responsible way to support at least our great nation, but we also want to exercise control over our lives and have the freedom and the means to exercise our own bliss. Careful management of your money, your credit and your taxes, which are now more than ever the basis for maintaining financial health and achieving your life goals. Just as sports medicine attempts to optimize speed and strength through knowledge of anatomy and physiology, understanding the interaction of income with deductions and loans can also maximize recovery and minimize tax liabilities.
In simple “anatomical” conditions, your federal personal tax return (be it the short form 1040EZ, the average form 1040A, or the long form 1040) starts at the top of the Income page. The long form includes ALL possible forms of earned or unearned income. Income includes, for example, daily wages, profit from the sale of assets, savings account, dividends on shares, rental income, royalties and, finally, “Other income”, such as gambling or lottery winnings.
The next section after “Income” is called “Adjustments”, since these “deductions” reflect significant financial decisions that “adjust” (reduce) a person’s annual gross income. Examples of these adjustments are teachers' special expenses, interest on student loans, relocation expenses, special medical / educational / pension payments / contributions, alimony paid and a part of self-employment taxes. Our income tax system recognizes these “exceptional” events as notable changes in a person’s gross income over the tax year. Thus, a possible fair way to determine the taxes that should be related is to adjust (reduce) your gross income for specific actions or events that are accepted or occur in the tax year BEFORE income tax begins. Your gross income is changed and restated as adjusted gross income (AGI). It is copied from the bottom of the first page in line 37 of the long IRS 1040 form to the top of the second page in line 38 of your federal tax return.
Keep your adjusted gross income comfortable. This number is used by the Internal Revenue Service (IRS) as a security tool. If you visit the IRS website, IRS.gov and request personal information, do not be surprised when you are asked about AGI from the previous tax year! The IRS uses the number to verify your online identity, such as a password or personal identification number (PIN). Your AGI is more important than you thought!
