Adjustments to Income: Federal Income Tax Return

Tax deductions that you don't need to itemize

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Adjustments to income refer to a set of tax deductions that individuals can take on their federal income tax return. The common factor: adjustments to income are taken directly on first page of the Form 1040.

Specifically, adjustments to income consist of the following tax deductions:


What's Strategic about Adjustments to Income?

  • Adjustments to income reduce a person's income.

We subtract adjustments from a person's total income to arrive at a person's adjusted gross income.

Later, on page two of the Form 1040, we will subtract either the standard deduction or itemized deductions, and also subtract any personal exemptions. The result is a person's taxable income. Taxable income is the amount of income left over after subtracting these various types of deductions. Taxable income is the figure we use when calculating a person's federal income tax liability.

In other words, adjustments reduce taxable income, and consequently they reduce the income tax. This is what makes adjustments beneficial.

That means, we can take adjustments to income even if we don't itemize.

Or we can take adjustments in addition to itemizing. 

That's because the alternative minimum tax is an alternate method of calculating the federal income tax liability, and this alternate method starts with adjusted gross income. Since adjustments lower adjusted gross income, adjustments can lower the alternative minimum tax. 

  • Increasing adjustments can increase other deductions.

Some tax deductions are limited by a person's adjusted gross income. Medical expenses, for example, can be deducted only to the extent medical expenses exceed 10% of adjusted gross income. Let's say Tom has adjusted gross income of $50,000 for the year. Let's also suppose Tom has medical expenses totaling $6,000 for the year. Tom can deduct his medical expenses to the extent they exceed 10% of his adjusted gross income. Now 10% of Tom's adjusted gross income is $5,000. His medical expenses of $6,000 exceed this threshold of $5,000 by $1,000.

So in this scenario, Tom can potentially deduct $1,000 out of his $5,000 of medical expenses as an itemized deduction on Schedule A.

Now let's alter this scenario. Tom now contributes $1,000 to a traditional individual retirement account for the year. Contributions to a traditional individual retirement account are deducted as an adjustment to income. This reduces Tom's adjusted gross income by $1,000. So his new adjusted gross income is $49,000. We now have a new threshold for the medical deduction. Instead of a threshold of $5,000 (10% of $50,000, we now have a threshold of $4,900 (10% of $49,000). As a result, Tom can now deduct $1,100 of his medical expenses, which is his 5,000 of medical expenses reduced by the 10% of adjusted gross income threshold. In this scenario, increasing adjustments has resulted in a larger medical deduction.

  • Increasing adjustments can increase other tax credits.

Some tax credits are calculated based on a person's adjusted gross income. 

  • Increasing adjustments can decrease other taxes.

Some surtaxes are calculated based on a person's adjusted gross income. For example, the 3.8% net investment income tax is based in part on a person's modified adjusted gross income. Lowering adjusted gross income can thus decrease the net investment income tax.

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