Adjusted Gross Income on Your Tax Return
You Don't Have to Itemize to Claim These Tax Deductions
Not all tax deductions require that you must itemize to claim them, and that's a good thing because itemizing is time-consuming, often complicated and not always in everyone's best interests.
According to the Tax Foundation, almost 70 percent of taxpayers claim the standard deduction instead, which frequently comes out to more than the cumulative total of everything they spent all year on things that were tax-deductible.
Adjustments to income are a completely different story. Sometimes called "above the line" deductions, you can take them on the first page of your tax return before you get around to deciding whether you're going to itemize or claim the standard deduction for your filing status.
The Most Commonly Claimed Adjustments to Income
Adjustments to income appear on your 1040 tax return beginning on line 23 and they extend through line 35. Some are more commonly claimed than others because many taxpayers have these types of expenses. Some of those most commonly claimed above-the-line deductions include:
- SEP-IRA, SIMPLE IRA and 401(k) deductions for the self-employed and the traditional IRA deduction: These appear on lines 28 and 32 respectively. Only the self-employed can claim the first for contributions made to these plans, and certain rules apply. As of 2017, total annual IRA contributions are capped for the employed at $5,500, or $6,500 if you're age 50 or older. You can deduct this much from your taxable income pretty much right off the bat if you contribute to this type of retirement plans.
- Student loan interest deduction: You can take a deduction for up to $2,500 in qualified student loan interest you paid during the year as of 2017. The loan must be one you're legally obligated to repay. If it's in your dependent's name and you're just helping him out by making payments, this doesn't count.
- Tuition and fees deduction: Unfortunately, this one is in limbo as of 2017, but it was available through the end of 2016 when Congress let it expired. You can take an above-the-line deduction for tuition and fees you paid on your own behalf or that of a dependent through the end of that tax year. It's still possible that Congress may renew this deduction for 2017.
- Health savings account deduction: If you make contributions to a health savings account, you can take an adjustment to income deduction for up to $3,400 if you're single or $6,750 for a family as of 2017.
- Early withdrawal penalties: Unfortunately, this applies only to certificates of deposit and timed savings accounts, not retirement accounts. But if you get hit with a penalty because you withdrew money sooner than you were supposed to, you can claim a deduction for it on the first page of your tax return without itemizing.
Some of these deductions phase out at higher income levels, and you may not be able to claim them if you're married but filing a separate return.
Other Adjustments to Income
Other above-the-line deductions depend on the particular details of your life, such as your vocation and your marital status.
- Classroom expenses for teachers and educators: This one is only good for $250, or $500 if you're married, filing a joint return and both you and your spouse are educators. Still, every deduction helps. According to the IRS, you must be "a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law." You can take an above-the-line deduction for unreimbursed work-related expenses you incur during the tax year if you qualify.
- Alimony paid: No, you don't have to pay taxes on the portion of your income that you must give your ex each month, but you have to provide her Social Security number on your tax return. She's taxed on this income instead. Certain rules apply, such as that the alimony must be provided for in a court order. If you just give her money out of the goodness of your heart, it doesn't count.
- Moving expenses: You can deduct many expenses associated with moving, but only if you have to move for job-related reasons, not simply because you'd like a change of scenery.
- Deduction for half the self-employment tax: If you're self-employed, you're hit with the burden of having to pay 100 percent of your Social Security and Medicare taxes. Your employer would pick up half this tab if you worked for someone else. But the IRS effectively gives that other half back to you on line 27 of your 1040. You still have to pay the tax, but you get credit for it.
- Self-employment health insurance: If you worked for someone else, you would have to itemize to claim a deduction for what you spend on health insurance premiums, and that deduction is subject to some rules and limitations. But you can deduct 100 percent of what you spend on premiums if you work for yourself. The policy can cover you, your spouse and your dependents.
- Qualified performing artists and other professions: This adjustment to income applies to only a select few—certain artists, as well as to reservists and some fee-basis government officials.
- Domestic Production Activities Deduction: This covers businesses in certain industries.
Adjustments to Income Lower Alternative Minimum Tax
The total of all these deductions is subtracted from your total income to arrive your adjusted gross income on line 37 of your 1040 tax return. You can later subtract either the standard deduction or itemized deductions from your AGI on the second page, as well as any personal exemptions. The result tells you your total taxable income, the figure that's used to calculate your federal income tax liability—how much you may owe the IRS or the amount of a tax refund you can expect.
Here's more good news: Adjustments to income are not added back when calculating the alternative minimum tax should you be subject to the AMT. This is 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. Adjustments reduce adjusted gross income so by extension they can lower the alternative minimum tax.
Increasing Adjustments Increases Other Deductions and Credits
Some itemized tax deductions are limited by a person's adjusted gross income. For example, medical expenses can be deducted only to the extent that they exceed 10 percent of your adjusted gross income as of 2017.
Let's say Tom has adjusted gross income of $50,000 for the year. Let's also suppose that Tom has medical expenses totaling $6,000 for the year. Tom can deduct his medical expenses to the extent that they exceed 10 percent of his AGI, or $5,000. His medical expenses of $6,000 exceed this threshold by $1,000 so Tom can potentially deduct $1,000 out of his $6,000 in medical expenses as an itemized deduction on Schedule A in this scenario.
Now let's say that Tom also contributes $1,000 to a traditional individual retirement account in that same tax year. These contributions are an adjustment to income, so this reduces Tom's AGI by $1,000.
Now his adjusted gross income is only $49,000. Instead of a threshold of $5,000 (10 percent of $50,000) for calculating his medical expenses deduction, he has a threshold of $4,900. As a result, Tom can deduct an additional $100 in medical expenses for a total of $1,100 instead of $1,000.
Increasing adjustments can also increase certain tax credits that are based on your adjusted gross income, and it can decrease other taxes because some surtaxes are calculated based on a person's adjusted gross income. For example, the 3.8 percent net investment income tax is based in part on a person's modified adjusted gross income. Reducing adjusted gross income can, therefore, decrease the net investment income tax.