12. Adjustments to income (deductible part of Self-employment tax;
Student Loan Interest deduction; Tuition and Fees deduction)612
An introductory preview of what expenses are deductible for adjusted gross
income and from adjusted gross income is important because a deduction for
AGI is more beneficial than a deduction from AGI.
a.
A deduction for AGI is more valuable in several ways.
(1)
A deduction from AGI can be lost if the taxpayer does not
itemize; note that the standard deduction is increased each
year for inflation.
(2)
Deductions for AGI reduce AGI and increase several itemized
deductions that are subject to a floor based on AGI. Examples
are:
(3)
b.
(a)
Personal casualty losses (subject to a reduction of 10%
of AGI).
(b)
Only medical expenses in excess of 10% of AGI can be
deducted. The taxpayer has to be poor (low AGI) as
well as sick (high expenses) to get any deduction.
(c)
Miscellaneous itemized deductions can be deducted
only to the extent that they exceed 2% of AGI.
Many states that “piggyback” onto the Federal income tax start
with Federal AGI. Deductions for AGI can reduce state income
taxes, often significantly.
Increases or decreases in AGI can work in the opposite direction for
charitable contributions. (i.e., the larger the AGI, the higher the ceiling
on the charitable contribution deduction).`
(1)
Such deductions are subject to a ceiling of 20%, 30% or 50%.
DEDUCTIONS FOR ADJUSTED GROSS INCOME
The various allowable deductions for adjusted gross income are categorized
as follows:
a.
Trade and business deductions available to all taxpayers, including
individuals, corporations, etc.
b.
Reimbursed employee business expenses. An employee is considered
to be in the trade or business of being an employee for purposes of
reimbursed employment related expenses.
c.
The capital loss deduction, and other losses on the sale or exchange
of property other than personal use property (e.g., casualty losses on
business property).
d.
Section 212 deductions are allowed for adjusted gross income only if
attributable to rent and royalty income;
(1)
All other § 212 deductions are deducted from adjusted gross
income.
(1)
Section 212 allows deductions for expenses related to the
production of income, for the management of assets held for
the production of income, or in connection with the
determination, collection, or refund of any tax.
e.
Alimony payments.
f.
Certain contributions to pension, profit-sharing, and annuity plans of
self-employed individuals (e.g., Keogh plan).
g.
Deduction for certain retirement savings such as traditional IRA’s.
h.
Penalty imposed on premature withdrawal of funds from time savings
accounts or deposits.
i.
Moving expenses.
j.
Deduction for certain interest on education loans.
k.
Deduction for one-half of the self-employment tax paid by a selfemployed taxpayer.
k.
n.
o.
Deduction for 100 percent of the medical insurance premiums paid by
a self-employed taxpayer for coverage of the taxpayer, spouse, and
any dependents.
Deduction for qualified tuition and related expenses under § 222.
Deduction for contribution to health savings accounts (HSAs) under
§ 223.
p.
Deduction for jury pay remitted by an employee to an employer.
q.
Deduction for certain expenses of elementary and secondary school
teachers (limited to $250).
Deduction for attorneys’ fees and court costs incurred in civil rights
r.
suits.
(1)
Applies to judgments and settlements paid after the enactment
of the American Jobs Creation Act of 2004 [i.e., October 22,
2004].
(2)
Covers causes of action deemed to involve “unlawful
discrimination” as defined in Code § 62(e)(19).
(3)
Prior to AJCA of 2004, these expenses were miscellaneous
itemized deductions—subject to the 2%-of-AGI limitation and
not deductible for AMT purposes.
(4)
Now these expenses are “above the line” deductions and can
be claimed for AMT purposes.
.