Deductions Allowed in Figuring Adjusted Gross Income

Adjusted gross income (AGI) is the amount that results after subtracting certain specific deductions from reportable income and this amount is used to determine various tax items. If you follow the instructions and order of the tax return, you arrive at adjusted gross income automatically.

Deductions taken into account in figuring AGI fall into two categories:

• Write-offs taken into account in reporting certain income or losses. For example, if capital losses exceed capital gains, up to $3,000 of such excess losses can be used to offset income (it operates as a subtraction within the income section on Form 1040). Similarly, business losses are reported within the income section as a negative number.
• Deductions enumerated in the adjusted gross income section of Form 1040. These include deductible IRA contributions, alimony payments, moving expenses, health savings account contributions, educator's deduction, tuition and fees deduction, and certain deductions related to self-employment (e.g., one-half of the self-employment tax, health insurance deduction, and contributions to a qualified retirement plan).

Adjusted gross income is a pivotal amount in federal income taxes. It is the figure on which many opportunities and limits in the tax law are based. These include:

• The amount of Social Security benefits to include in income, if any. (Note: Aside from taxes, AGI is also used to determine whether Medicare beneficiaries must pay an additional Part B premium.)
• Itemized deductions for medical expenses, charitable contributions, casualty and theft losses, and miscellaneous itemized expenses
• Eligibility to contribute to a deductible IRA when participating in an employer's retirement plan, to a Roth IRA, or to convert a traditional IRA to a Roth IRA
• Ability to deduct up to $25,000 in losses from rental real estate activities
• Eligibility for an above-the-line deduction for tuition and fees
• Eligibility for various tax credits, including the child tax credit, the dependent care credit, earned income credit, credit for the elderly, retirement savers credit, and education credits