Itemizing your tax deductions is time-consuming and complicated, and it's not always in everyone's best interests, but not all tax deductions must be itemized in order to be claimed. You can enter adjustments to income, sometimes called "above the line" deductions, on your tax return before you decide whether to itemize or claim the standard deduction.
Adjustments to income come off your gross total income and result in your adjusted gross income (AGI).
Eligibility for a good many itemized deductions and tax credits depends on your AGI. The higher it is, the less likely you are to qualify.
Adjustments to Income on Your Return
Your AGI appears on line 11 of the 2021 Form 1040, the return you'd file in 2022. The standard deduction or the total of your itemized deductions appears just after this, on line 12a. You can claim the qualified business income deduction on line 13 if you're eligible, and then add it to your standard or itemized deductions. That results in your taxable income, which appears on line 15.
The Numbered Schedules
Three numbered schedules must accompany your tax return if any of them applies to your financial situation and your tax return. Their corresponding information is then entered on your return itself and in most cases helps determine your AGI.
These numbered schedules were introduced when Form 1040 was first redesigned in 2018. There were six of them in that tax year. They're numerical, while those still in effect from before 2018 are identified by letters, such as Schedule A, which lists your itemized deductions.
There are only three numbered Schedules for the 2021 Form 1040, including for additional income and "above the line" deductions, additional taxes, and additional credits and payments, respectively.
Schedule 1: Added Earnings
Form 1040 asks you to report some added earnings on Schedule 1. These include:
- Business income or loss as calculated on Schedule C
- Alimony received
- Taxable credits, offsets, or refunds from state and/or local tax returns
- Rents royalty income as calculated on Schedule E
- Farm income or loss as calculated on Schedule F
- Gambling income
- Prizes and awards
- Capital gains or losses
- Unemployment compensation
- "Other Income," which can include prizes and awards, gambling winnings, and earnings from an activity not engaged in for profit, such as money you made on your hobby.
The total of all these sources of income is arrived at on line 10 of Schedule 1 and transfers to line 8 of the 2021 Form 1040.
Schedule 1: Adjustments to Income
Your adjustments to income are entered in Part II of Schedule 1. These are the amounts that were previously referred to as "above-the-line" deductions, because they appeared on the first page of the tax returns that were in use in 2017 and earlier years. They were entered just above those forms' final page on the line that showed adjusted gross income.
These adjustments/deductions include:
- Educator expenses
- Costs incurred by military reservists, performing artists, and fee-based government officials
- Health savings accounts (HSAs)
- Moving expenses for members of the armed forces
- Several self-employment costs, such as retirement plan contributions, health insurance premiums, and half the self-employment tax reported on Schedule SE
- Savings-withdrawal-penalty amounts
- Student loan interest
- Tuition and other educational expenses
- The traditional IRA deduction
- Alimony paid
The total of all these deductions is subtracted from your gross income to arrive at your AGI on line 10 of your 2021 tax return. You can then subtract either the standard deduction or the total of your itemized deductions from your total income to get your AGI.
You would then add your standard or itemized deductions and qualified business income, and then subtract the total from your AGI (on line 11), to get your taxable income. This is the figure that's used to calculate your federal income tax liability—how much you owe the IRS or the amount of a tax refund you can expect.
Rules and limits apply to some of these adjustments to income. You can't always claim the full amount of what you spent on these expenses.
The adjustment to income for classroom expenses for teachers and educators is $250. It increases to to a total of $500 if you're married and filing a joint return, and both you and your spouse are educators. You and your spouse can't each claim a $500 adjustment to income.
You must be a teacher, instructor, counselor, principal, or aide for students from kindergarten through grade 12. You must work at least 900 hours a year in a school that provides elementary or secondary education.
It used to be that you didn't have to pay taxes on the portion of your income that you contributed to your ex-spouse each month in the form of alimony, but that changed with the Tax Cuts and Jobs Act in 2018. Your ex-spouse used to be taxed on this income instead, but not anymore.
You must provide your ex's Social Security number on your tax return if you want to claim this adjustment for divorces entered into prior to 2019. Certain rules apply, such as that the alimony must be provided for in a court order.
You could deduct many expenses associated with moving prior to 2018, but this changed with the TCJA as well. This adjustment to income is only available to service members beginning in 2018 through at least 2025, when the TCJA potentially expires.
Your move must be necessitated by a military order and be a permanent change of station. Moving expenses incurred by your spouse or dependents qualify as well.
The Self-Employment Tax
You must pay 100% of your Social Security and Medicare taxes if you're self-employed. That is referred to as the "self-employment tax." Your employer would pick up half of these taxes if you worked for someone else, but the IRS effectively gives that other half back to you as an adjustment to income on line 15 of Schedule 1 of the 2021 Form 1040.
You still have to pay that half the tax, but at least you can deduct it from your taxable income.
Self-Employed Health Insurance
You would have to itemize to claim a deduction for what you spend on health insurance premiums if you worked for someone else, and that deduction is subject to some limitations. But you can deduct 100% of what you spend on premiums if you work for yourself. The policy can cover you, your spouse, and your dependents.
No other insurance coverage can be available to you, however, such as through an employer if you also hold down a regular job, or your spouse's employer.
Effect on the Alternative Minimum Tax
Adjustments to income aren't added back when you're calculating the alternative minimum tax (AMT) if you're subject to it. The AMT is an alternate method of calculating your federal income tax liability, and it starts with adjusted gross income. Adjustments to income reduce your AGI, so by extension they can lower the alternative minimum tax as well.
Effect on Other Deductions and Credits
Some itemized tax deductions are limited by a taxpayer's AGI. For example, medical expenses can only be deducted to the extent that they exceed 7.5% of your AGI. For example, suppose you have an AGI of $50,000 for the 2021 year. You have qualifying medical expenses totaling $6,000 for the year. You can deduct your medical expenses to the extent that they exceed 7.5% of your AGI, or $3,750. Your medical expenses of $6,000 exceed this threshold by $2,250, so you can claim $2,250 out of your $6,000 in expenses as an itemized deduction.
But suppose that you also contribute $1,000 to a traditional individual retirement account in that same tax year. These contributions are an adjustment to income, so this reduces your AGI by $1,000, to $49,000. You'd now have a threshold of $3,675, or 7.5% of $49,000, rather than $3,750 for calculating your medical expenses deduction. You can deduct an additional $75 in medical expenses for a total of $2,325 rather than $2,250.
Effect on Other Taxes
Increasing adjustments to income can also decrease other taxes, because some surtaxes are calculated based on AGIs. The 3.8% net investment income tax is based in part on a person's modified adjusted gross income over certain thresholds. You can avoid paying this tax if you can reduce your AGI below those thresholds.
Most tax preparation software is well equipped to handle all of these different scenarios, and you can always seek the help of a tax professional if you really don't feel that you can handle it all yourself.
Frequently Asked Questions (FAQs)
What does it mean if you don't claim any adjustments to income?
Adjustments to income lower your AGI, which is your taxable income, so the fewer you take, the more you might be taxed.
Can you make adjustments to income and claim the standard deduction?
Yes, adjustments to income are called "above-the-line" deductions, while itemized or standard deductions are called "below-the-line" deductions. They are calculated at separate points on your tax return.