8514 / What is adjusted gross income?

Adjusted gross income is broadly defined as gross income minus certain specifically deductible items allowed by the Code. Deductions from gross income, also referred to as above-the-line deductions, are the most tax beneficial type of deductions because they tend to be taken dollar-per-dollar with fewer limitations than what are known as below-the-line or itemized deductions. Additionally, as a measuring tool, adjusted gross income is important because many thresholds upon which tax benefits phase out or taxes phase in are directly tied to adjusted gross income (for example, subject to the taxpayer being able to itemize, medical expenses are deductible only to the extent that they exceed 7.5 percent (10 percent in earlier years) of adjusted gross income for the tax year).

The Code specifically designates which deductions are subtracted from adjusted gross income as above-the-line deductions. The following is a list of deductions permitted by the Code:

1. Expenses directly incurred in carrying on a trade, business or profession (not as an employee – see Q 8524)

2. The deduction allowed for contributions made by a self-employed individual to a qualified pension, annuity, or profit sharing plan, or a simplified employee pension or SIMPLE IRA plan

3. Certain reimbursed expenses of an employee in connection with employment, provided the reimbursement is included in gross income (if the employee accounts to his employer and reimbursement does not exceed expenses, reporting is not required)

4. Deductions related to property held for the production of rents and royalties (within limits)

5. Deductions for depreciation and depletion by a life tenant, an income beneficiary of property held in trust, or an heir, legatee or devisee of an estate

6. Deductions for losses from the sale or exchange of property

7. The deduction allowed for amounts paid in cash by an eligible individual to a traditional individual retirement account (IRA), or individual retirement annuity

8. The deduction allowed for amounts forfeited as penalties because of premature withdrawal of funds from time savings accounts

9. Alimony payments made to the taxpayer’s spouse (this provision was repealed; alimony payments are now includable in the income of the payor spouse and excluded from the recipient’s income for tax years beginning after 2018)

10. Certain reforestation expenses

11. Certain jury duty pay remitted to the taxpayer’s employer

12. Moving expenses permitted by IRC Section 217 (generally suspended for 2018-2025)

13. The deduction for Archer Medical Savings Accounts under IRC Section 220(i)

14. The deduction for interest on education loans

15. The deduction for qualified tuition and related expenses

16. The deduction for contributions (within limits) to Health Savings Accounts

17. The deduction for attorneys’ fees involving discrimination suits

18. The deduction for certain expenses of elementary and secondary school teachers up to $250 (this provision was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH)). PATH also provided that the $250 dollar limit will now be adjusted annually for inflation (the amount is $300 in 2022-2025 and $250 in 2020 and 2021).