04 August 2015
Check out my oversimplified diagram of the federal income tax process. It shows the general flow of IRS Form 1040 so you can visualize where each of the tax terms I use fits into the actual process. I color-coded it to make it easier to follow (hopefully). In the blue we have various terms for income. In the green we have all things I call tax benefits (adjustments, deductions, exemptions, credits). In the red are the taxes.
When we are talking about adjustments or adjustments to income we are essentially talking about tax benefits that can reduce adjusted gross income (AGI). Most tax benefits (deductions, exemptions, and credits) are limited by AGI (or modified AGI (MAGI)). In other words, if your AGI is above a certain level you are disqualified from using that tax benefit. Adjustments can reduce your AGI, making you eligible for additional tax benefits. I am a big fan of adjustments.
You will sometimes hear adjustments referred to as above the line deductions. "The Line" being the point before AGI is calculated. It's an accurate term. Adjustments are essentially bonus deductions that can be taken in addition to the standard deduction or the Schedule A itemized deductions. But given their ability to reduce AGI I prefer to call them adjustments (to income).
Let's look at some of these adjustments in detail.
Educator Expenses. If you're a teacher and you spend money on supplies for your classroom you can claim an adjustment of up to $250. Married teachers filing jointly can claim up to $500. You can't have been reimbursed by the school to claim the adjustment. Expenses for home schooling do not qualify.
Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials. Virginia Beach reservists take note: if you travel more than 100 miles from home to perform your duties you can claim an adjustment for your expenses.
Health Savings Account Deduction. If you (not your employer) contributed to your HSA this year, you can claim an adjustment for it.
Moving Expenses. Did you move to Virginia Beach for a new job? If you had unreimbursed moving expenses you can take an adjustment for expenses you incurred. (If your employer paid for the move you don't qualify.)
Self Employed Adjustments - If you have your own business you can take adjustments for part of your self-employment tax, your retirement plan, and your health insurance premiums.
Penalty on Early Withdrawal of Savings. Needed to get your money out of a CD for an unforeseen expense? If the bank levied a fee for the early withdrawal you can write it off your taxes as an adjustment.
IRA Deduction. If you made qualified contributions to a traditional IRA you can take it off your taxes as an adjustment. You must have earned income to contribute to an IRA. Military members can count untaxed combat pay as earned income for taking this adjustment.
Student Loan Interest Deduction. With so much student loan debt this is a big one. You can deduct up to $2,500 for student loan interest you paid. This adjustment goes away when MAGI goes above $80K for individuals, $160K for joint filers. Married filing separately do not qualify for this adjustment. You must be legally responsible for the loan. In other words, paying off your grandchild's loan does not qualify you for this adjustment unless your name was on the loan documents.
Tuition and Fees Deduction. This one is rarely used because the American Opportunity Credit and Lifetime Learning Credits are usually more valuable. However, there is a narrow niche where it makes sense to take this adjustment. Most tax software will automatically compare the benefits between this adjustment and the tax credits for education and give you the best one, but check to make sure you are getting the best tax benefit.
Line 36 (Miscellaneous). This is a potpourri of various rarely used adjustments for things such as forfeited jury duty pay, reforestation expenses, and attorney fees for unlawful discrimination lawsuits. If you have a strange situation, ask your tax preparer, you might qualify for a miscellaneous adjustment.
The ability to reduce your AGI with adjustments can have a snowballing effect in reducing your total tax bill. Not only does it lower your taxable income, but it can also qualify you for additional deductions and credits on your tax return. Make sure you're claiming all of the adjustments for which you are eligible.