How to Reduce Your AGI for High-Income Earners and Small Business Owners

If you’ve ever wondered how to qualify for more deductions and pay less tax as a high-income earner, lowering your adjusted gross income (AGI) could be the answer.

Your AGI is one of the most important numbers on your tax return. It affects your tax bracket, determines your eligibility for deductions and credits, and even influences how much contribution you can make to a retirement account. Luckily, you have some control over it.

In this guide, we’ll explore legitimate ways to lower your adjusted gross income (AGI) so you can either boost your refund or reduce what you owe the IRS.

What Exactly Is AGI?

To put it simply, AGI is your total gross income after subtracting specific deductions known as adjustments or above-the-line deductions.

Your gross income includes everything you earn that’s taxable. This can be your wages, self-employment income, investment earnings, rental income, and more.

On the other hand, adjustments are special expenses the IRS allows you to subtract before calculating your taxable income. They “sit above the line” on your tax return before itemized or standard deductions and directly reduce your AGI.

Common examples include:

• Contributions to a Traditional IRA or SEP IRA
• Health Savings Account (HSA) deposits
• Student loan interest
• Educator expenses for teachers
• Self-employed health insurance premiums
• Half of self-employment tax

Think of AGI as your tax baseline. It’s the starting point the IRS uses to figure out how much of your income is taxable and whether you qualify for certain deductions or credits.

How to Calculate Your AGI?

Here’s the basic formula for calculating your AGI:

Total gross Income – Adjustments = AGI

To illustrate, here’s an example:

Let’s say you earn $95,000 from your job and another $2,000 in interest income. That puts your total gross income at $97,000. During the year, you contribute $6,000 to a traditional IRA and pay $1,000 in student loan interest. Those two deductions total $7,000.

Using the formula:

$97,000 (gross income) – $7,000 (adjustments) = $90,000 (AGI)

Your adjusted gross income is $90,000. This number serves as the starting point for determining your tax bracket and the deductions or credits you can claim.

AGI vs. Taxable Income

Your adjusted gross income and taxable income are related but not the same.

AGI, as explained above, is your income after subtracting above-the-line deductions or adjustments.

Taxable income, on the other hand, comes after subtracting either the standard deduction or your itemized deductions from your AGI. This is the actual amount the IRS uses to calculate your income tax.

Let’s go back to the earlier example.

If your AGI were $90,000 and you take the standard deduction of $15,000 for a single filer, your taxable income is:

$90,000 – $15,000 = $75,000

So, you’ll pay tax only on $75,000, not on your total income of $97,000.

Why Lowering Your AGI Matters

A smaller AGI usually leads to lower taxable income and more chances for tax-saving benefits. The IRS uses your AGI to decide:

• If you qualify for credits like the Child Tax Credit or Saver’s Credit
• Whether you can deduct IRA contributions and medical expenses
• Your eligibility for education credits and ACA healthcare subsidies
• How much of your Social Security income is taxable

Lowering your AGI can also help avoid income-related phaseouts. These phaseouts can limit deductions and credits for higher earners.

It can also lead to reduced state taxes. Many states base their income tax on your federal AGI.

In short, managing your AGI wisely gives you more flexibility, more access to deductions and credits, and ultimately, more money left in your pocket at the end of the year.

How to Reduce Your AGI

Here are practical, IRS-approved strategies to lower your adjusted gross income:

1. Contribute to a Retirement Account

Putting money into a pre-tax retirement plan is one of the easiest ways to lower your AGI. If your employer offers a C, your contributions are taken out before taxes, which reduces your taxable income automatically.

In 2025, you can contribute up to $23,500, or $30,000 if you are 50 or older.

If you don’t have a 401(k), you can open a Traditional IRA and contribute up to $7,000, or $8,000 if you are 50 or older. The more you save for retirement, the less income the IRS taxes today.

And if you‘re self-employed, A SEP IRA or SIMPLE IRA offers even higher contribution limits, which can significantly shrink your AGI.

2. Max Out Your Health Savings Account (HSA)

If you’re enrolled in a high-deductible health plan, you can open an HSA and contribute tax-free money. It’s one of the few accounts that gives you triple tax benefits:

• Contributions reduce your AGI.
• Growth is tax-free.
• Withdrawals for qualified medical expenses aren’t taxed.

In 2025, you can contribute $4,300 if you’re single or $8,550 for family coverage, with an extra $1,000 allowed if you’re 55 or older.

HSA funds don’t expire, so every contribution not only lowers your AGI but also builds long-term, tax-free savings.

3. Deduct Student Loan Interest

If you’re still paying off student loans, you can deduct up to $2,500 in interest each year. This deduction applies whether you itemize or not.

It reduces the income the IRS taxes by directly reducing your AGI. The benefit begins to phase out if your MAGI exceeds $95,000 (single) or $195,000 (married filing jointly).

This simple adjustment is often overlooked but can make a noticeable difference, especially if you’re also close to qualifying for other income-limited credits.

4. Claim Educator Expenses

Teachers, counselors, and classroom aides who buy supplies with their own money can claim up to $300, or $600 if both spouses are educators.

Expenses, such as books, classroom materials, and educational software, are deducted from your AGI before it is calculated.

5. Deduct Self-Employed Business Expenses

If you freelance or run your own business, every legitimate expense you deduct reduces your AGI.

You can write off things like:

• Office rent, utilities, and supplies
• Travel and vehicle mileage
• Professional subscriptions or software
• Health insurance premiums

Your net profit (income minus expenses) is what flows into your AGI, so tracking and claiming all qualified expenses directly lowers your taxable income.

6. Contribute to a Flexible Spending Account (FSA)

If your employer offers an FSA, use it. You can contribute up to $3,200 in 2025 for healthcare or dependent-care expenses using pre-tax dollars.

Because FSA contributions are deducted before income and payroll taxes, they automatically reduce your AGI.

7. Use Tax-Loss Harvesting

If you have investments in taxable accounts, selling underperforming assets can work in your favor. When you sell at a loss, those losses offset any capital gains you realized during the year.

If your losses exceed your gains, you can use up to $3,000 of those losses to offset other income. Anything left can carry forward to future years. Over time, this strategy helps keep your AGI lower and your portfolio more tax-efficient.

8. Deduct Alimony Payments (for Pre-2019 Agreements)

If your divorce or separation agreement was finalized before 2019, alimony payments you make are still deductible.

They come off the top of your income, reducing your AGI dollar-for-dollar. Agreements made after 2018 no longer qualify for this deduction, but if you fall under the older rules, it’s a valuable adjustment to claim.

9. Time Your Income and Deductions

Sometimes, managing when you earn income or pay expenses can lower your AGI.

If you expect to make more next year, you might defer a bonus or client payment until January. Or, if you have deductible expenses coming up, you can pay them in December instead of waiting.

By shifting income forward and expenses back, you can bring down your AGI in a high-earning year without changing how much you earn overall.

10. Take Advantage of Long-Term Strategies

Some tax moves help you lower AGI over multiple years:

• Roth IRA Conversions: Pay tax now for tax-free withdrawals later. Once funds are in a Roth, they no longer raise your AGI in retirement.
• Municipal Bonds: Interest from these bonds is generally exempt from federal tax, so it doesn’t increase your AGI.
• Tax-Deferred Annuities and Life Insurance: Growth is sheltered from taxes until withdrawal, allowing you to manage when income appears on your return.
• Rental Real Estate: Depreciation deductions can offset rental income, lowering your AGI without reducing cash flow.

These options take planning but can keep your taxable income lower for decades.

FAQs About Lowering AGI

1. What’s the fastest way to reduce AGI?

Contribute to pre-tax retirement accounts or an HSA. These reduce your taxable income immediately and lower AGI at the same time.

2. Does charitable giving lower AGI?

Charitable donations usually lower taxable income, not AGI, unless you itemize. However, gifting appreciated assets can help reduce future taxable gains.

3. Can self-employed taxpayers lower AGI?

Yes. Business expenses, retirement contributions, and self-employed health insurance premiums all reduce AGI directly.

4. How is AGI different from MAGI?

MAGI starts with AGI but adds back certain deductions, such as tax-exempt interest and foreign income exclusions, to determine eligibility for credits and programs.

5. Can student loan payments reduce AGI?

Yes. Up to $2,500 of student loan interest can be deducted from your income before AGI is calculated.

6. Can you lower AGI after December 31?

Yes, but your options are limited. You can still make IRA or HSA contributions before the tax-filing deadline for the prior year. Other deductions must be made before year-end.

Plan Ahead to Keep Your AGI Low

Your adjusted gross income (AGI) influences nearly every part of your tax situation. It affects your tax rate, what deductions and credits you can claim, and how much of your income is ultimately taxed. Keeping it low through proactive planning can lead to consistent savings year after year.

At Tax Samaritan, we go beyond simple tax preparation. We build forward-looking strategies designed to lower your AGI, reduce future tax exposure, and give you lasting peace of mind.

Ready to see how proactive tax planning can make a difference?

Schedule your free 30-minute consultation today and take the first step toward a stronger financial future.