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Adjustments to
Gross Income

Learn how above-the-line deductions reduce your gross income to arrive at Adjusted Gross Income (AGI): the most important number on your tax return.

CPA Regulation (REG)

What is Gross Income?

Under IRC Section 61, gross income means all income from whatever source derived. This includes wages, salaries, tips, interest, dividends, business income, capital gains, rents, royalties, and more.

From Gross Income to AGI

Gross Income IRC § 61 − Adjustments IRC § 62 = AGI Line 11 The Core Formula

Why AGI Matters

AGI is the threshold that determines eligibility and phase-outs for dozens of tax benefits. A lower AGI means more favorable tax treatment across the board.

IRA Deductions
Traditional IRA deductibility phases out based on AGI and filing status.
Education Credits
American Opportunity and Lifetime Learning Credits use modified AGI limits.
Medical Deductions
Itemized medical expenses are deductible only above \( 7.5\% \) of AGI.

Above vs Below the Line

Above-the-Line Below-the-Line
Also called Adjustments to income Itemized / Standard deductions
IRC Section § 62 § 63
Available to All taxpayers Those who itemize (mostly)
Reduces Gross Income → AGI AGI → Taxable Income
Effect on AGI Lowers AGI No effect on AGI

The Core Rule: IRC § 62

IRC § 62 defines Adjusted Gross Income as gross income minus specific deductions. Only items explicitly listed in § 62 qualify as adjustments. This is a closed list: if it is not enumerated, it is not an above-the-line deduction.

§ 62 Adjustments Educator Expenses Up to $300 HSA Contributions IRC § 223 SE Tax (50%) Deductible portion IRA Contributions Traditional IRA Student Loan Int. Up to $2,500 Alimony Paid Pre-2019 decrees These are only some of the major adjustments: see § 62(a) for the full list

Major Adjustments: Personal

1
Educator Expenses: Up to \( \$300 \) for qualified K-12 teachers (\( \$600 \) if MFJ and both spouses are educators).
2
HSA Contributions: Contributions to a Health Savings Account are deductible. Annual limits vary by coverage type.
3
Traditional IRA: Deductible contributions up to \( \$7,000 \) (under 50) or \( \$8,000 \) (50+) for 2024, subject to AGI phase-outs if covered by employer plan.
4
Student Loan Interest: Up to \( \$2,500 \) deduction. Phases out at higher modified AGI levels.
5
Alimony Paid: Deductible only for divorce decrees executed before January 1, 2019. Post-2018 alimony is not deductible.

Major Adjustments: Self-Employment

1
50% of Self-Employment Tax: Self-employed individuals pay both employer and employee shares of FICA. The employer-equivalent portion (\( 50\% \)) is deductible.
2
Self-Employed Health Insurance: \( 100\% \) of health, dental, and long-term care premiums for the SE individual and family.
3
SE Retirement Contributions: Contributions to SEP-IRA, SIMPLE IRA, or solo 401(k) plans.

Other Notable Adjustments

Moving Expenses
Only for active-duty military members who move due to a permanent change of station.
Penalty on Early Withdrawal
Penalties from early withdrawal of savings (CDs, time deposits) are deductible above the line.

How to Apply Adjustments

1
Calculate Gross Income: Sum all income from all sources under IRC § 61 (wages, interest, business income, capital gains, etc.).
2
Identify Eligible Adjustments: Check each item against the § 62(a) list. Verify dollar limits and phase-out thresholds.
3
Apply Limits and Caps: Educator: \( \$300 \). Student loan interest: \( \$2,500 \). IRA: \( \$7,000/\$8,000 \). SE tax: exactly \( 50\% \).
4
Subtract from Gross Income: \(\text{AGI} = \text{Gross Income} - \text{Total Adjustments}\). Report on Form 1040, Schedule 1, Part II.
5
Verify the Result: Confirm AGI flows to Line 11 of Form 1040. Use this for downstream calculations (credits, phase-outs).

Example 1: Single Filer

Maria is a single taxpayer, age 35. She earned \( \$72,000 \) in wages, \( \$1,200 \) in bank interest, and contributed \( \$4,000 \) to a traditional IRA. She paid \( \$1,800 \) in student loan interest. What is her AGI?

1
Gross Income: \( \$72{,}000 + \$1{,}200 = \$73{,}200 \)
2
IRA Deduction: \( \$4{,}000 \) (under the annual limit, assume no phase-out)
3
Student Loan Interest: \( \$1{,}800 \) (under \( \$2{,}500 \) cap)
4
AGI: \( \$73{,}200 - \$4{,}000 - \$1{,}800 = \$67{,}400 \)

Example 2: Self-Employed

Carlos is self-employed. His net SE income is \( \$95,000 \). He paid \( \$13,414 \) in self-employment tax and \( \$8,400 \) for his family's health insurance. He also contributed \( \$6,500 \) to a traditional IRA.

1
Gross Income: \( \$95{,}000 \) (net SE income)
2
50% of SE Tax: \( \$13{,}414 \times 50\% = \$6{,}707 \)
3
SE Health Insurance: \( \$8{,}400 \) (100% deductible)
4
IRA: \( \$6{,}500 \)
5
AGI: \( \$95{,}000 - \$6{,}707 - \$8{,}400 - \$6{,}500 = \$73{,}393 \)

Example 3: MFJ with Educator

Tom and Sarah file MFJ. Tom earns \( \$55,000 \) (W-2). Sarah earns \( \$48,000 \) as a 5th grade teacher and spent \( \$450 \) on classroom supplies. They contributed \( \$7,200 \) to an HSA (family coverage).

1
Gross Income: \( \$55{,}000 + \$48{,}000 = \$103{,}000 \)
2
Educator Expense: \( \min(\$450, \$300) = \$300 \) (capped at \( \$300 \) per educator)
3
HSA: \( \$7{,}200 \) (within family coverage limit)
4
AGI: \( \$103{,}000 - \$300 - \$7{,}200 = \$95{,}500 \)

Common Mistakes

✕ Post-2018 Alimony
Alimony for divorce decrees after 12/31/2018 is not deductible. Only pre-2019 agreements qualify.
✕ Roth IRA as Adjustment
Roth IRA contributions are never deductible. Only traditional IRA contributions can be an adjustment.
✕ Moving Expenses
Civilian moving expenses are suspended through 2025 (TCJA). Only active military qualifies.
✕ Exceeding Caps
Forgetting the \( \$300 \) educator or \( \$2,500 \) student loan interest limits. Amounts above caps are lost.
✕ Confusing Lines
Mixing up above-the-line (Schedule 1, Part II) with below-the-line (Schedule A) deductions on the exam.

Adjustment Reference Table

Adjustment Limit / Rule IRC Section
Educator Expenses \( \$300 \) per educator § 62(a)(2)(D)
HSA Contributions Varies by coverage type § 223
50% SE Tax Employer-equivalent half § 164(f)
SE Health Insurance 100% of premiums § 162(l)
Traditional IRA \( \$7{,}000 / \$8{,}000 \) (2024) § 219
Student Loan Interest \( \$2{,}500 \) max § 221
Alimony Paid Pre-2019 decrees only § 215 (repealed post-2018)

Question 1 of 5

Which of the following reduces a taxpayer's Adjusted Gross Income (AGI)?

Question 2 of 5

A self-employed individual paid \( \$14{,}000 \) in self-employment tax for the year. How much can they deduct as an adjustment to gross income?

Question 3 of 5

In 2024, Alex finalized a divorce and is required to pay \( \$18{,}000 \) in alimony annually. Can Alex deduct this as an adjustment to gross income?

Question 4 of 5

Lisa, a 3rd-grade teacher, spent \( \$500 \) on classroom supplies. What is the maximum she can deduct as an educator expense adjustment?

Question 5 of 5

James has gross income of \( \$85{,}000 \). He contributed \( \$5{,}000 \) to a Roth IRA and paid \( \$2{,}000 \) in student loan interest. What is James's AGI?