Question

No handwriting or photo (tax accounting)

a-Explain the different concepts of income from accounting, economics and taxation perspectives

b-What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law? Give two examples of each deduction

Answer 1

Concept # 1. Accounting Income:

Accounting income, often referred to as business income or conventional income is measured in accordance with generally accepted accounting principles. The profit and loss account or income statement determines the net income or operating performance of a business enterprise for some particular period of time.

Income is determined by following income statement approach, i.e., by comparing sales revenue and costs related to the sales revenue.

Net income is determined as follows:

Revenue – Expenses = Net Income

The net income defined as the difference between revenue and expenses determine the business income of an enterprise. Under the income statement approach, expenses are matched with the revenues and the income statement is the most significant financial statement to measure income of a business enterprise. Thus, business income of an entity represents the difference between the realised revenues arising from the transactions of the period and the corresponding historical costs.

Accounting income is the increase in the resources of a business (or other) entity which results from the operations of the enterprise. In other words, accounting income is the net increase in owner’s equity resulting from the operations of a company.

It should be distinguished from the capital contributed to the entity. Income is a net concept; it consists of the revenue generated by the business, less losses and less expired costs that contribute to the production of revenue.

Accounting income is measured in terms of transactions which the business enterprise enters into with third parties in its operational activities. The transactions relate mainly to revenues received from the sale of goods and/or services, and the various costs incurred in achieving these sales.

All these transactions will, in some way, involve the eventual receipt or payment of cash, and, if the eventual cash exchanges with third parties is not complete at the moment of measuring income, this incompleteness is allowed and adjustments are made for amounts due by debtors for sales on credit, amounts due to creditors for purchase on credit.

Once these adjustments are made, the revenue and costs which have been recognised as having arisen during the defined period are then linked or matched in order to derive accounting income. Accounting income, thus, is computed in terms of a matching or related operational revenue and cost.

These revenues and costs are derived mainly from recorded business transactions, although they are also subject to the specific application of accounting principles such as those involved in depreciation and inventory accounting. In traditional accounting concept of income, a typical balance sheet describes and depicts unallocated or unmatched past costs as assets of the business.

Components of Accounting Income:

A profit and loss account or income statement, as stated earlier, determine the net income or business income of a business enterprise and displays revenues and expenses of the enterprises for a specified period.

Therefore, business income has the following two major components or elements:

(1) Revenue.

(2) Expenses.

Besides the revenues and expenses, gains and losses are also considered while determining business income or net profit of an enterprise.

Concept # 2. Economic Income:

The economic concept of income is based on Hick’s concept (1946) of income defined as follows:

“… The maximum value which he can consume during a week, and still expect to be as well-off at the end of the week as he was at the beginning.”

Hicks presented his concept of “well offness” as the basis for a rough approximation of personal income. According to Hicks, income is the maximum which can be consumed by a person in a defined period without impairing his “well offness” as it existed at the beginning of the period.

“Well offness” is equivalent to wealth or capital. Hick’s concept of personal income was subsequently adopted by Alexander and subsequently revised by Solomon’s to an equivalent concept of corporate profit. Alexander defined income of an enterprise as the maximum amount which a firm can distribute to shareholders during a period and still be as well off at the end of the period as at the beginning.”

Economic income may be defined as the operating earnings plus the change in asset values during a time period. Economic income is measured in real terms and results from changes in the value of assets rather than from the matching of revenue and expenses.

Like accounting income, it is not based on money values. The “Well offness” is measured by comparing the value of company at two points in terms of the present value of expected future net receipts at each of these two points.

In other words, economic income is the consumption plus saving expected to take place during a certain period, the saving being equal to the change in economic capital.

Economic income may be expressed as follows:

EI = C + (K₁ – K₂)

where El = Economic Income

C = Consumption

K₁ = Capital as at period 1

K₂ = Capital as at period 2

Economic income and Hicksian approach follow balance sheet approach of income measurement. The balance sheet approach determines the income as the difference between the value of capital at the opening and closing balance sheets adjusted for the dividend or the additional capital contributed during the year.

Under the balance sheet approach, income is determined as follows:

Income = Capital at the end minus capital at the beginning of the year plus Dividend or saving during the year minus capital contributed during the year. It is significant to observe that under economic income and balance sheet approach, different items of assets and liabilities possessed by firm at the beginning as well as at the end of the year are to be valued to determine income for the year. Therefore, income measurement in this approach depends upon the valuation of assets and liabilities.

Thus, economic income of the business is the amount by which its net worth has increased during the period, adjustments are made for any new capital contributed by its owners or for any distributions made by the business to its owners.

This form of words would also serve to define accounting income, in so far as net accounting income is the figure which links the net worth of the business as shown by its balance sheet at the beginning of the accounting period with its net-worth as shown by its balance sheet at the end of the period.

The correspondence between the two ideas of increased worth is, however, a purely verbal one; for Hicksian income demands that in evaluating net worth we capitalize expected future net receipts, while accounting income only requires that we evaluate net assets on the bases of their unexpired costs. The relationship between these two different concepts of increase in net worth, economic income and accounting income may be summed up in the following manner, by starting with accounting income and arriving at economic income:

Accounting Income:

+ Unrealized tangible asset changes during the period

– Realised tangible asset changes that occurred in prior periods

+ Changes in the value of intangible assets

= Economic Income

The changes in the value of intangible assets do not refer to the conventional intangible assets found in the balance but to a concept called subjective goodwill arising from the use of expectations in the computation of economic income. The following example illustrates economic income and accounting income.

Taxation perspectives

The paper substantiated that under the conditions of the digital revolution, which makes it difficult to perform tax control over income flows and expenses of enterprises, especially over cross-border ones, it is time to look for better alternatives to the taxation of enterprise’s profits.It is shown that not only a reduction in the corporate income tax rate and the provision of various preferences for investment and innovation activities, but also a radical change in approaches to taxation of corporate income, such as the transition to distributed profit tax or destination-based business cash flow tax can act as instruments of competition.The foreign experience of applying the distributed profit tax on the example of Estonia, Macedonia, Georgia and Latvia has been studied. It is justified, that the introduction of distributed profit tax instead of corporate income tax did not become such a factor that negatively affected economic events in the analyzed countries. Moreover, there is a reason to believe, that such«castling» contributed to the improvement of the situation, at least in one of the countries (Estonia).The analysis of the destination-based business cash flow tax as an alternative to the corporate income tax and the distributed profit tax were made. Differences between these types of taxes are demonstrated, their advantages and disadvantages are highlighted.It is shown, that the discussion of destination-based business cash flow tax indicates that alternative approaches to profit taxation are in the agenda in the countries of the world. This is also confirmed by modern studies, based on economic and mathematical modeling of situations, in which the corporate income tax rate is significantly reduced or the tax is completely eliminated. It is proved, that, based on the analysis of theory, international experience and the current situation in Ukraine, the introduction of a withdrawn capital tax will be the best alternative to the existing corporate income tax, which currently does not fulfill a stimulating function, but promotes corruption and evasion from payment to the budget. The results of calculations of possible budget losses from the replacement of the corporate income tax by the withdrawn capital tax are demonstrated. Possible measures to compensate such losses in the first years of the newtax introduction have been formulated.The necessity of continuing and deepening the analysis of the experience of countries, that have already switched to the collection of the distributed profit tax, as well as assessing the impact of introducing a withdrawn capital tax on attracting external and domestic capital investments using methods of economic and mathematical modeling, is validated.

What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law

In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income isadjusted gross income minus allowances for personal exemptions and itemizeddeductions. For most individual tax purposes, AGI is more relevant than gross income. Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above

The difference between deductions for and deductions from adjusted gross income AGI under US tax law is also termed as The Difference between Above-The-Line and Below-The-Line Deductions

Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above the line” deductions and “below the line” deductions. What is more, “above the line” deductions are worth more to the bottom line than “below the line” deductions; “the line” being your adjusted gross income, known as (AGI). As such, your (AGI) determines your tax rate; consequently you want to have as many “above the line” deductions as possible.

“Above the line” deductions are those that you have subtracted on the top portion of your tax return, before your adjusted gross income (AGI) has been determined. “Above the line” deductions are important in helping you reduce your adjusted gross income which is the key to reducing your tax liability.

These are examples of, however are not a complete list of, “above the line” deductions:

• Schedule C or F Business Deductions

• Rental Deductions

• Stock Losses

• Moving Expenses

• Student Loan Interests Paid

• Alimony

“Below the line” deductions are those that you will subtract from your adjusted gross income (AGI) sum at the bottom of the tax return. So your (AGI) has already been determined when you utilize “below the line” deductions.

These are examples of, however are not a complete list of, “below the line” deductions:

• Charitable Donations

• Medical Expenses

• Tax

• Interest Expenses

“Above the line” deductions are more advantageous to the tax payer. Additionally, “below the line” deductions are not allowable unless in excess of the required (AGI) percentage. For example, medical expenses are “below the line” deductions; however they are only allowable if they exceed 7.5% of the tax payers adjusted gross income, (AGI).

“Above the line” deductions are invaluable in the sense that they are fully allowable even in the event the tax payer takes standardized deductions as apposed to itemized.

AGI calculation

Your adjusted gross income is all of the income you bring in, less certain adjustments. You can find the allowable reductions to your income on the front page of your Form 1040. Commonly used adjustments include the following:

• IRA and self-employed retirement plan contributions
• Alimony payments (for divorce agreements prior to 2019)
• Self-employed health insurance payments
• One-half of any self-employment taxes paid

Other adjustments used in calculating AGI include the following:

• Health savings account deductions
• Penalties on the early withdrawal of savings
• Educator expenses
• Student loan interest
• Moving expenses (for tax years prior to 2018)
• Tuition and fees
• Deductions for domestic production activities (for tax years prior to 2018)
• Certain business expenses of performing artists, reservists, and fee-basis government officials

AGI effects on your taxes

The amount of your AGI affects how you can use numerous credits and exemptions. Your AGI affects the amount you can claim for the dependent care credit, credits for the elderly or permanently disabled, the adoption credit, the child tax credit, the Hope & Lifetime Learning credits, and the earned income credit. Many deductions phase out or disappear altogether if you have an AGI above certain limits. Deductions affected by your AGI include the following:

• Total itemized deductions
• Miscellaneous itemized deductions (for tax years prior to 2018)
• Mortgage insurance premiums
• Qualified motor vehicle taxes
• Charitable contributions
• Medical deduction allowance

Taxation perspectives

The paper substantiated that under the conditions of the digital revolution, which makes it difficult to perform tax control over income flows and expenses of enterprises, especially over cross-border ones, it is time to look for better alternatives to the taxation of enterprise’s profits.It is shown that not only a reduction in the corporate income tax rate and the provision of various preferences for investment and innovation activities, but also a radical change in approaches to taxation of corporate income, such as the transition to distributed profit tax or destination-based business cash flow tax can act as instruments of competition.The foreign experience of applying the distributed profit tax on the example of Estonia, Macedonia, Georgia and Latvia has been studied. It is justified, that the introduction of distributed profit tax instead of corporate income tax did not become such a factor that negatively affected economic events in the analyzed countries. Moreover, there is a reason to believe, that such«castling» contributed to the improvement of the situation, at least in one of the countries (Estonia).The analysis of the destination-based business cash flow tax as an alternative to the corporate income tax and the distributed profit tax were made. Differences between these types of taxes are demonstrated, their advantages and disadvantages are highlighted.It is shown, that the discussion of destination-based business cash flow tax indicates that alternative approaches to profit taxation are in the agenda in the countries of the world. This is also confirmed by modern studies, based on economic and mathematical modeling of situations, in which the corporate income tax rate is significantly reduced or the tax is completely eliminated. It is proved, that, based on the analysis of theory, international experience and the current situation in Ukraine, the introduction of a withdrawn capital tax will be the best alternative to the existing corporate income tax, which currently does not fulfill a stimulating function, but promotes corruption and evasion from payment to the budget. The results of calculations of possible budget losses from the replacement of the corporate income tax by the withdrawn capital tax are demonstrated. Possible measures to compensate such losses in the first years of the newtax introduction have been formulated.The necessity of continuing and deepening the analysis of the experience of countries, that have already switched to the collection of the distributed profit tax, as well as assessing the impact of introducing a withdrawn capital tax on attracting external and domestic capital investments using methods of economic and mathematical modeling, is validated.

What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law

In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income isadjusted gross income minus allowances for personal exemptions and itemizeddeductions. For most individual tax purposes, AGI is more relevant than gross income. Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above

The difference between deductions for and deductions from adjusted gross income AGI under US tax law is also termed as The Difference between Above-The-Line and Below-The-Line Deductions

Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above the line” deductions and “below the line” deductions. What is more, “above the line” deductions are worth more to the bottom line than “below the line” deductions; “the line” being your adjusted gross income, known as (AGI). As such, your (AGI) determines your tax rate; consequently you want to have as many “above the line” deductions as possible.

“Above the line” deductions are those that you have subtracted on the top portion of your tax return, before your adjusted gross income (AGI) has been determined. “Above the line” deductions are important in helping you reduce your adjusted gross income which is the key to reducing your tax liability.

These are examples of, however are not a complete list of, “above the line” deductions:

• Schedule C or F Business Deductions

• Rental Deductions

• Stock Losses

• Moving Expenses

• Student Loan Interests Paid

• Alimony

“Below the line” deductions are those that you will subtract from your adjusted gross income (AGI) sum at the bottom of the tax return. So your (AGI) has already been determined when you utilize “below the line” deductions.

These are examples of, however are not a complete list of, “below the line” deductions:

• Charitable Donations

• Medical Expenses

• Tax

• Interest Expenses

“Above the line” deductions are more advantageous to the tax payer. Additionally, “below the line” deductions are not allowable unless in excess of the required (AGI) percentage. For example, medical expenses are “below the line” deductions; however they are only allowable if they exceed 7.5% of the tax payers adjusted gross income, (AGI).

“Above the line” deductions are invaluable in the sense that they are fully allowable even in the event the tax payer takes standardized deductions as apposed to itemized.

AGI calculation

Your adjusted gross income is all of the income you bring in, less certain adjustments. You can find the allowable reductions to your income on the front page of your Form 1040. Commonly used adjustments include the following:

• IRA and self-employed retirement plan contributions
• Alimony payments (for divorce agreements prior to 2019)
• Self-employed health insurance payments
• One-half of any self-employment taxes paid

Other adjustments used in calculating AGI include the following:

• Health savings account deductions
• Penalties on the early withdrawal of savings
• Educator expenses
• Student loan interest
• Moving expenses (for tax years prior to 2018)
• Tuition and fees
• Deductions for domestic production activities (for tax years prior to 2018)
• Certain business expenses of performing artists, reservists, and fee-basis government officials

AGI effects on your taxes

The amount of your AGI affects how you can use numerous credits and exemptions. Your AGI affects the amount you can claim for the dependent care credit, credits for the elderly or permanently disabled, the adoption credit, the child tax credit, the Hope & Lifetime Learning credits, and the earned income credit. Many deductions phase out or disappear altogether if you have an AGI above certain limits. Deductions affected by your AGI include the following:

• Total itemized deductions
• Miscellaneous itemized deductions (for tax years prior to 2018)
• Mortgage insurance premiums
• Qualified motor vehicle taxes
• Charitable contributions
• Medical deduction allowance

Taxation perspectives

The paper substantiated that under the conditions of the digital revolution, which makes it difficult to perform tax control over income flows and expenses of enterprises, especially over cross-border ones, it is time to look for better alternatives to the taxation of enterprise’s profits.It is shown that not only a reduction in the corporate income tax rate and the provision of various preferences for investment and innovation activities, but also a radical change in approaches to taxation of corporate income, such as the transition to distributed profit tax or destination-based business cash flow tax can act as instruments of competition.The foreign experience of applying the distributed profit tax on the example of Estonia, Macedonia, Georgia and Latvia has been studied. It is justified, that the introduction of distributed profit tax instead of corporate income tax did not become such a factor that negatively affected economic events in the analyzed countries. Moreover, there is a reason to believe, that such«castling» contributed to the improvement of the situation, at least in one of the countries (Estonia).The analysis of the destination-based business cash flow tax as an alternative to the corporate income tax and the distributed profit tax were made. Differences between these types of taxes are demonstrated, their advantages and disadvantages are highlighted.It is shown, that the discussion of destination-based business cash flow tax indicates that alternative approaches to profit taxation are in the agenda in the countries of the world. This is also confirmed by modern studies, based on economic and mathematical modeling of situations, in which the corporate income tax rate is significantly reduced or the tax is completely eliminated. It is proved, that, based on the analysis of theory, international experience and the current situation in Ukraine, the introduction of a withdrawn capital tax will be the best alternative to the existing corporate income tax, which currently does not fulfill a stimulating function, but promotes corruption and evasion from payment to the budget. The results of calculations of possible budget losses from the replacement of the corporate income tax by the withdrawn capital tax are demonstrated. Possible measures to compensate such losses in the first years of the newtax introduction have been formulated.The necessity of continuing and deepening the analysis of the experience of countries, that have already switched to the collection of the distributed profit tax, as well as assessing the impact of introducing a withdrawn capital tax on attracting external and domestic capital investments using methods of economic and mathematical modeling, is validated.

What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law

In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income isadjusted gross income minus allowances for personal exemptions and itemizeddeductions. For most individual tax purposes, AGI is more relevant than gross income. Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above

The difference between deductions for and deductions from adjusted gross income AGI under US tax law is also termed as The Difference between Above-The-Line and Below-The-Line Deductions

Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above the line” deductions and “below the line” deductions. What is more, “above the line” deductions are worth more to the bottom line than “below the line” deductions; “the line” being your adjusted gross income, known as (AGI). As such, your (AGI) determines your tax rate; consequently you want to have as many “above the line” deductions as possible.

“Above the line” deductions are those that you have subtracted on the top portion of your tax return, before your adjusted gross income (AGI) has been determined. “Above the line” deductions are important in helping you reduce your adjusted gross income which is the key to reducing your tax liability.

These are examples of, however are not a complete list of, “above the line” deductions:

• Schedule C or F Business Deductions

• Rental Deductions

• Stock Losses

• Moving Expenses

• Student Loan Interests Paid

• Alimony

“Below the line” deductions are those that you will subtract from your adjusted gross income (AGI) sum at the bottom of the tax return. So your (AGI) has already been determined when you utilize “below the line” deductions.

These are examples of, however are not a complete list of, “below the line” deductions:

• Charitable Donations

• Medical Expenses

• Tax

• Interest Expenses

“Above the line” deductions are more advantageous to the tax payer. Additionally, “below the line” deductions are not allowable unless in excess of the required (AGI) percentage. For example, medical expenses are “below the line” deductions; however they are only allowable if they exceed 7.5% of the tax payers adjusted gross income, (AGI).

“Above the line” deductions are invaluable in the sense that they are fully allowable even in the event the tax payer takes standardized deductions as apposed to itemized.

AGI calculation

Your adjusted gross income is all of the income you bring in, less certain adjustments. You can find the allowable reductions to your income on the front page of your Form 1040. Commonly used adjustments include the following:

• IRA and self-employed retirement plan contributions
• Alimony payments (for divorce agreements prior to 2019)
• Self-employed health insurance payments
• One-half of any self-employment taxes paid

Other adjustments used in calculating AGI include the following:

• Health savings account deductions
• Penalties on the early withdrawal of savings
• Educator expenses
• Student loan interest
• Moving expenses (for tax years prior to 2018)
• Tuition and fees
• Deductions for domestic production activities (for tax years prior to 2018)
• Certain business expenses of performing artists, reservists, and fee-basis government officials

AGI effects on your taxes

The amount of your AGI affects how you can use numerous credits and exemptions. Your AGI affects the amount you can claim for the dependent care credit, credits for the elderly or permanently disabled, the adoption credit, the child tax credit, the Hope & Lifetime Learning credits, and the earned income credit. Many deductions phase out or disappear altogether if you have an AGI above certain limits. Deductions affected by your AGI include the following:

• Total itemized deductions
• Miscellaneous itemized deductions (for tax years prior to 2018)
• Mortgage insurance premiums
• Qualified motor vehicle taxes
• Charitable contributions
• Medical deduction allowance

Taxation perspectives

The paper substantiated that under the conditions of the digital revolution, which makes it difficult to perform tax control over income flows and expenses of enterprises, especially over cross-border ones, it is time to look for better alternatives to the taxation of enterprise’s profits.It is shown that not only a reduction in the corporate income tax rate and the provision of various preferences for investment and innovation activities, but also a radical change in approaches to taxation of corporate income, such as the transition to distributed profit tax or destination-based business cash flow tax can act as instruments of competition.The foreign experience of applying the distributed profit tax on the example of Estonia, Macedonia, Georgia and Latvia has been studied. It is justified, that the introduction of distributed profit tax instead of corporate income tax did not become such a factor that negatively affected economic events in the analyzed countries. Moreover, there is a reason to believe, that such«castling» contributed to the improvement of the situation, at least in one of the countries (Estonia).The analysis of the destination-based business cash flow tax as an alternative to the corporate income tax and the distributed profit tax were made. Differences between these types of taxes are demonstrated, their advantages and disadvantages are highlighted.It is shown, that the discussion of destination-based business cash flow tax indicates that alternative approaches to profit taxation are in the agenda in the countries of the world. This is also confirmed by modern studies, based on economic and mathematical modeling of situations, in which the corporate income tax rate is significantly reduced or the tax is completely eliminated. It is proved, that, based on the analysis of theory, international experience and the current situation in Ukraine, the introduction of a withdrawn capital tax will be the best alternative to the existing corporate income tax, which currently does not fulfill a stimulating function, but promotes corruption and evasion from payment to the budget. The results of calculations of possible budget losses from the replacement of the corporate income tax by the withdrawn capital tax are demonstrated. Possible measures to compensate such losses in the first years of the newtax introduction have been formulated.The necessity of continuing and deepening the analysis of the experience of countries, that have already switched to the collection of the distributed profit tax, as well as assessing the impact of introducing a withdrawn capital tax on attracting external and domestic capital investments using methods of economic and mathematical modeling, is validated.

What is the difference between deductions for and deductions from adjusted gross income AGI under US tax law

In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income isadjusted gross income minus allowances for personal exemptions and itemizeddeductions. For most individual tax purposes, AGI is more relevant than gross income. Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above

The difference between deductions for and deductions from adjusted gross income AGI under US tax law is also termed as The Difference between Above-The-Line and Below-The-Line Deductions

Permissible tax deductions work to abate tax liability. What is problematic is the lack of awareness in distinction of “above the line” deductions and “below the line” deductions. What is more, “above the line” deductions are worth more to the bottom line than “below the line” deductions; “the line” being your adjusted gross income, known as (AGI). As such, your (AGI) determines your tax rate; consequently you want to have as many “above the line” deductions as possible.

“Above the line” deductions are those that you have subtracted on the top portion of your tax return, before your adjusted gross income (AGI) has been determined. “Above the line” deductions are important in helping you reduce your adjusted gross income which is the key to reducing your tax liability.

These are examples of, however are not a complete list of, “above the line” deductions:

• Schedule C or F Business Deductions

• Rental Deductions

• Stock Losses

• Moving Expenses

• Student Loan Interests Paid

• Alimony

“Below the line” deductions are those that you will subtract from your adjusted gross income (AGI) sum at the bottom of the tax return. So your (AGI) has already been determined when you utilize “below the line” deductions.

These are examples of, however are not a complete list of, “below the line” deductions:

• Charitable Donations

• Medical Expenses

• Tax

• Interest Expenses

“Above the line” deductions are more advantageous to the tax payer. Additionally, “below the line” deductions are not allowable unless in excess of the required (AGI) percentage. For example, medical expenses are “below the line” deductions; however they are only allowable if they exceed 7.5% of the tax payers adjusted gross income, (AGI).

“Above the line” deductions are invaluable in the sense that they are fully allowable even in the event the tax payer takes standardized deductions as apposed to itemized.

AGI calculation

Your adjusted gross income is all of the income you bring in, less certain adjustments. You can find the allowable reductions to your income on the front page of your Form 1040. Commonly used adjustments include the following:

• IRA and self-employed retirement plan contributions
• Alimony payments (for divorce agreements prior to 2019)
• Self-employed health insurance payments
• One-half of any self-employment taxes paid

Other adjustments used in calculating AGI include the following:

• Health savings account deductions
• Penalties on the early withdrawal of savings
• Educator expenses
• Student loan interest
• Moving expenses (for tax years prior to 2018)
• Tuition and fees
• Deductions for domestic production activities (for tax years prior to 2018)
• Certain business expenses of performing artists, reservists, and fee-basis government officials

AGI effects on your taxes

The amount of your AGI affects how you can use numerous credits and exemptions. Your AGI affects the amount you can claim for the dependent care credit, credits for the elderly or permanently disabled, the adoption credit, the child tax credit, the Hope & Lifetime Learning credits, and the earned income credit. Many deductions phase out or disappear altogether if you have an AGI above certain limits. Deductions affected by your AGI include the following:

• Total itemized deductions
• Miscellaneous itemized deductions (for tax years prior to 2018)
• Mortgage insurance premiums
• Qualified motor vehicle taxes
• Charitable contributions
• Medical deduction allowance