When you file your taxes, you are going to notice that there is a figure known as you adjusted gross income or AGI. Knowing what the adjusted gross income definition is, and how it impacts your taxes, is important toward filing an accurate return and getting all the money back that you are potentially entitled to.

What is Adjusted Gross Income?

Your adjusted gross income is your gross income minus any applicable adjustments. Not very helpful, huh? For example, if you run a business or own a rental, you can take business expenses off of your gross income. This will lower your gross income and lower your adjusted gross income. Keep in mind that your adjusted gross income will further be reduced by your standard deduction (or itemized deductions) and personal exemptions to arrive at your taxable income.

Adjustments to Arrive at Adjusted Gross Income

To calculate your adjusted gross income, start with your gross income and subtract the adjustments. Some examples of adjustments that you will subtract include:

• Contributions To Retirement Accounts including IRAs, SEP IRAs, and SIMPLE IRAs
• Education Expenses Such As Tuition and Fees Or Student Loan Interest
• A Health Savings Account deduction
• Moving expenses
• Alimony
• Penalties to banks on early withdrawals
• Teachers business expenses
• Half of your self employment tax
• Business and Rental expenses (losses)

To help you calculate your adjusted gross income, you can use the tax calculator.

How Does Adjusted Gross Income Help You?

Adjusted gross income lowers your taxable income right off the bat. For example, if you made $30,000 last year, but you have $1,000 in student loan interest, you will have an adjusted gross income of only $29,000. If you had business expenses of an additional $15,000, your adjusted gross income goes down even further. Lowering your AGI will then lower your taxable income and put you in a lower tax bracket.

Adjusted Gross Income vs Gross Income vs Taxable Income

Your gross income is all the money that you made in the past year. Your adjusted gross income is what the IRS is going to start with when it comes to what you may owe as tax. Your taxable income is the income that you are going to be taxed on. You adjust your gross income with the qualified adjustments to get your AGI, then you take the standard deduction and personal exemptions afterward to get your taxable income.

An example of this would be:

You make $30,000 this year (gross income) and you have $10,000 worth of adjustments, so your AGI is $20,000. After deducting $5800 for the standard deduction, and then taking $3700 as your personal exemption, assuming you are filing status is single, you would have a taxable income of just over $10,000.

To sum it up, your AGI will lessen the amount of your income that taxed.

Now that you understand adjusted gross income, of course, we have to mention that is different than your modified adjusted gross income.

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How much money do you have to make to file taxes? What is the minimum income to file taxes?

A reader, Rob, recently asked about the new numbers for this year. Let’s take a look at the requirements for the minimum income to file taxes in 2011 (and due in 2012).

2011 Minimum Income Requirements

The IRS released the minimum income to file taxes in 2011. For the first time in a few years, there is an increase in the minimum income to file.

For the 2011 tax year, you will need to file taxes if your gross income meets the minimum income for your filing status and age:

This table does not apply to dependents. See When Do Kids Need to File Taxes? for minimum income to file taxes for children.

Social Security Income

Gross income doesn’t include social security benefits.

However, there is an exception to this rule if half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly). Once that happens, you’ll need to file a 2011 tax return. Married filing separate also have different social security rules.

Other Income Sources

There are special rules for self employment earnings and church earnings. You must file taxes if your:

• Self employment net earnings are greater than $400.
• Church earnings are greater than $108.28 and are exempt from employer Social Security and Medicare.

More Tax Filing Requirements

Optional filing. Even if you are not required to file a tax return, you can choose to file one. You may want to file an optional tax return if you had any federal withholding or are entitled to tax credits, like the earned income tax credit, and want to get a refund.

Other filing requirements. In addition to the income requirements, there are other circumstances when you must file a tax return. One example is if you sold your home. For all the requirements, see Publication 17.

When to file. If you earn enough money to file a tax return, you must file your tax return by the tax deadline.

Prior year returns. For last years requirements you can see the minimum income to file taxes in 2010.

After you file. Once you file, you can see How Long Does it Take to Get Your Tax Refund Back?

2011 Tax Calculator

If you are under the minimum income to file taxes, and are unsure whether or not filing your taxes will benefit you, use our 2011 Tax Calculator to compute your tax liability and refund.

Tax Filing Online

Now that you know how much money you have to make to file taxes, you can go ahead and file your taxes online right now for free with TurboTax!

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Tax loss harvesting can be an effective means of managing your taxes using your investment portfolio. While the practice should be managed with care, when done correctly, it can have a dramatic impact on your tax bill.

The timing of tax loss harvesting is a crucial element – there are various rules that must be understood and followed in order to get the benefit without creating additional problems.

What is Tax Loss Harvesting?

Tax loss harvesting is selling an investment near the end of the year in order to create a realized loss that can be used to offset any realized gains or ordinary income on your taxes. When you purchase an investment, such as a stock, and the price of that stock decreases, there is a loss.

Before the stock is sold, this loss is classified as an unrealized loss because the price of the stock may reverse, rising to ultimately create a gain. It is only after the stock is sold that the loss becomes realized and the loss may be used as an offset for other gains, having real tax consequences.

The practice of intentionally causing losses to become realized for the purposes of reducing taxes is called tax loss harvesting.

Why Should You Harvest Tax Losses?

Tax loss harvesting can be an effective practice if it is done carefully and within the proper overall context of the investment portfolio. While it is most commonly done at the end of the year as part of end of the year tax planning, tax loss harvesting can be accomplished at any time during the course of the year.

Your savings from tax loss harvesting will be based on your current tax bracket. You can see the impact that tax loss harvesting will have on your taxes using the tax calculator. Reduce your capital gains by the amount of the loss to see the difference in your expected tax due.

Don’t forget to make sure that the closing of the position is in keeping with the overall investment philosophy. For example, if you believe that the stock in question is on the verge of reversing, the lost profit that will result from selling the stock will more than offset the gain from the tax savings. Clearly this would not be a good choice, and yet it is one that may result if one attempts to harvest tax losses without care.

The Wash Sale Rule

One of the significant tax rules that you must be aware of is the wash sale rule. Under this rule, after a position is closed, it must remain closed for a minimum of 30 days in order for a new basis to be created. Prior to the introduction of this rule, you could simply sell a security at a loss and then quickly repurchase it as a new trade.

Now, if you repurchase the security within 30 days of selling it, the basis price used for calculating tax consequences reverts to the original price used. It is important to be aware that substituting a nearly identical security may not be sufficient to escape the wash sale rule. If the replacement security is essentially the same, the tax loss may be disallowed.

Loss Carryover

The other provision of the tax code that is important to understand is that in years in which a tax loss is substantial, there is a maximum allowable deduction: $3,000. If you exceed this amount, the capital loss may be carried forward into future years and used to offset future gains.

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It’s time for end of year tax planning! Time to get your financial house in order for tax season! What could be more fun that taking a break from holiday festivities and shopping to start thinking about taxes?

It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards!

Here’s an updated list of money moves to make before the new year.

Year End Tax Moves

1. Run a preview. Before the end of the year run an estimate using the tax calculator or the Turbo Tax estimator. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end!
2. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
3. Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years.
4. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
5. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Stay tuned for more on how to determine if you should accelerate your property tax deduction into the current year.
6. Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $13,000. More than that and you are subject to the gift tax.
7. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. It’s also a good time to remember to enroll in your 2012 flexible spending account if you haven’t done so already.
8. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
9. Watch the news. Keep on eye on what is happening with the payroll tax cut. A 2012 payroll tax cut extension could impact your paycheck for next year.
10. Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
11. Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
12. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
13. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves. Once AMT comes into play, some of the end of the year tax moves will have no tax benefit.
14. Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
15. Determine if you need to pay tax or file. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t ususally welcome surprises. Do yourself a favor and review the requirements before the end of the year.
16. Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
17. Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year.

What additional moves are you planning to make for 2011 end of year tax planning?

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Our investment club just finished submitting all of our cost basis reporting to our broker, Scottrade. And to be honest, it wasn’t an easy task! Our treasurer spent hours on the task.

If you’re like me, you’ve gotten a flurry of cost basis reporting requests from your brokers via email. And it’s about time I actually calculate and submit all the information… I just wish it was going to be that easy.

Let’s take a look at what is going on with cost basis reporting, what the brokers have to do, and most importantly what we have to do to prepare for 2012.

Cost Basis Reporting Requirements

The Energy Improvement and Extension Act of 2008 law requires that brokers now have to report the adjusted cost basis for securities you sell to the IRS on Form 1099-B. In addition, they have to classify the sale as short or long term. Until now, brokers only had to show the proceeds from a sale of securities.

What is Cost Basis?

The cost basis is the amount you paid for the stock, plus any commissions and fees. When you sell a stock, the difference between your cost basis and your proceeds from the sale are taxable.

The information will obviously be helpful to complete our taxes in the future, but there will be some growing pains over the next few years since brokers only had to retain that information since January of 2009.

New Cost Basis Reporting Deadlines

Brokers will have to report cost basis amounts for securities bought on or after the following dates:

• Stocks: January 1, 2011
• Mutual funds and DRPs: January 1, 2012
• All others: January 1, 2013

Brokers don’t have to report the basis for stocks you bought before 2011.

Cost Basis Methods

Going forward you can direct your broker on which method you want to use to calculate your cost basis. Brokers will have a default method of determining the cost basis. Unless you tell them differently, they’ll report the default method for any future sales. You can pick the method to apply to all transactions, or you can pick the method on a sale by sale basis.

Stocks. Many brokers, including Scottrade are using the first in first out (FIFO) method for stocks.

Mutual Funds. For mutual funds, you can average the basis of shares in an account; the averages will be separate for each account. In addition, beginning in 2012 you can use the average basis for one account, but not for another if you choose. If you previously used the double category method, you are no longer allowed to do so. If you want to use the average basis method, you should notify your broker in writing if it isn’t the default method they selected.

DRPs. For dividend reinvestment plans, you can average the basis for shares bought on or after January, 1, 2011, if “the written plan documents require that at least 10 percent of every dividend paid is reinvested in identical stock”. Fantastic. I can’t think of anything I’d rather do than spend time researching this requirement for each of my DRIPs.

In addition to FIFO and average cost methods, you’ll be able to select other cost basis methods based on the broker options. Some of the other cost basis methods include LIFO (last in first out), HIFO (highest in first out), low cost, minimum tax, maximum gain and specific lots.

What Do You Have to Do?

Since brokers don’t have to track the basis before 2011, that still falls on you. But brokers are going to ask you to provide that information to complete their records. In addition, many of the flurry of emails are asking you to select your cost basis method.

Do you have to provide the cost basis for stocks you already own to your broker? Well, I guess you don’t have to. But you’ll want to because when it comes time to file your taxes, you’ll want the gain (or loss) reported on your 1099-B to match the gain (or loss) you report on your Schedule D. Inconsistencies will be just like asking for a nice little visit from the IRS.

Do you have to select a cost basis method? While you can select a preferred cost basis method with your broker right now, you don’t have to do anything. Your broker will apply their default method and you are all set. This may not be the best choice from a tax standpoint, but at least you can cross it off your to do list.

Will there be a tax document delay? Probably. Because of the new reporting rules, brokers won’t have to give you your 1099-B until February 15 each year (it used to be January 31). If you’re used to working on your taxes right away, you might have to wait a little longer in the future if you had any stock sales.

Action Plan

All the countless hours I’ve spent wasting away making sure my Quicken data is exact down to the penny is finally paying off! Especially since some of our stocks were acquired years ago, with countless dividend reinvestments. It’ll be a pain, but at least I know I can put together the data to submit to our brokers.

I know there are many of you who are going to groan at the painful task of collecting all of this information. Feel free to commiserate about tracking down the cost basis of a 20 year old stock purchase with many subsequent reinvestments and additional share purchases in the comments!

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