What
is adjusted gross income? Distinguish between two types of
tax-sheltered investment returns.
Adjusted gross income (AGI) is a key term in the United States tax system that represents an individual's total income from all taxable sources, minus specific deductions allowed by the Internal Revenue Service (IRS). It is used to determine one's taxable income and the amount of taxes owed.
Two types of tax-sheltered investment returns are:
1. Tax-Deferred Investment Returns: These are investment returns that can accumulate and grow tax-free until they are withdrawn. Contributions to tax-deferred accounts, such as Traditional Individual Retirement Accounts (IRAs) and 401(k) retirement plans, are typically deductible from taxable income, reducing one's current tax liability. However, taxes are eventually paid when these funds are withdrawn in retirement, at which point they are treated as ordinary income.
2. Tax-Free Investment Returns: These are investment returns that are not subject to income taxes, neither during the growth phase nor at withdrawal. Examples of tax-free investments include Roth IRAs, Roth 401(k) retirement plans, and municipal bonds. Contributions to Roth accounts are made with after-tax money, so they do not provide an immediate tax deduction. However, qualified distributions from these accounts, including investment earnings, are tax-free.
The main difference between these two types of tax-sheltered investment returns lies in when taxes are paid. Tax-deferred investment returns postpone taxes to a later date when funds are withdrawn, while tax-free investment returns eliminate taxes altogether on qualified distributions.
Adjusted Gross Income (AGI) is a term used in the United States tax system to describe an individual or household's total income after allowing for specific deductions and adjustments. It is an important figure used to determine a taxpayer's eligibility for certain deductions, credits, and tax calculations.
There are two types of tax-sheltered investment returns: Tax-deferred and Tax-exempt.
1. Tax-deferred investment returns: These are investment returns that are not taxed in the current year but are deferred to a later date. Common examples include contributions to retirement accounts like traditional 401(k)s or Traditional Individual Retirement Accounts (IRAs). The contributions made to these accounts are deducted from your current taxable income, reducing your tax liability for the year. The investment gains and income generated within these accounts are not taxed until you withdraw the funds in retirement, usually in the form of distributions or withdrawals. Examples of tax-deferred investment returns include capital gains, dividends, and interest earned within a traditional retirement account.
2. Tax-exempt investment returns: These are investment returns that are not subject to income tax at all. They are typically earned from investments in certain types of accounts, bonds, or securities that generate income that is not taxable. Tax-exempt investments include municipal bonds (issued by state or local governments), certain types of federal government bonds, and investments in a Roth Individual Retirement Account (IRA). The income generated from these investments is exempt from federal income tax. This means you will not owe any income tax on the earnings or gains generated from these investments, even when you withdraw the funds.
It is important to note that the specific rules and regulations regarding tax-sheltered investment returns can vary. It is advisable to consult with a tax professional or refer to the Internal Revenue Service (IRS) guidelines for the most accurate and up-to-date information related to your specific situation.