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Determining Income Adjustments on Your Tax Return

You are not required to itemize deductions for tax claims related to these tax claims.

Income Adjustments

Income adjustments reduce the taxable income. You can claim income adjustments and either the standard or itemized deductions, but you cannot claim both the standard deduction and itemized deductions. Income adjustments are calculated on Schedule 1 and then transferred to line 11 of Form 1040 for the year 2022. Schedule 1 includes both income adjustments and additional income that is not reported elsewhere on your tax return. There are 10 common income adjustments that you can claim.

Income Adjustments on Your Tax Return

Your adjusted income is shown on line 11 of Form 1040 for the year 2022, which is the return you will file in 2023. Your standard deduction or total itemized claims appear on line 12. You can claim the standard deduction for qualified business income on line 13 if you qualify, then add it to the standard or itemized deduction. This results in your taxable income, which appears on line 15.

Numbered Schedules

Your tax return should be accompanied by three numbered schedules if they apply to your financial and tax situation. The corresponding information from these schedules is entered into your tax return and helps determine your adjusted income in most cases.

Schedule 1: Additional Income

Form 1040 requests you to report certain additional income on Schedule 1. This includes: business income or loss as calculated on Schedule C, paid expenses, taxable credits or offsets from local and/or foreign tax returns, income from rentals and royalties as calculated on Schedule E, farm income or loss as calculated on Schedule F, gambling income, awards and prizes, capital gains or losses, unemployment compensation, “Other Income,” which can include awards and prizes and profit from a hobby, such as money earned from your hobby.

Schedule 1: Income Adjustments

Your income adjustments are entered in Part II of Schedule 1. These are the amounts that were previously referred to as “above-the-line deductions” because they appeared on the first page of tax returns that were in use in 2017 and earlier years. This information has been entered above the final page of these forms on the line that shows the adjusted gross income.

These adjustments/deductions include: educator expenses, expenses incurred by military reserves and performing artists and government officials with wages, health savings accounts (HSAs), moving expenses for armed forces members, various self-employment expenses, such as retirement plan contributions, health insurance payments, and half of self-employment tax as reported on Schedule SE, early withdrawal penalty amounts, student loan interest, tuition and other educational expenses, traditional IRA deduction, and family expenses paid in 2018 or earlier.

The total of all these deductions is subtracted from your gross income to arrive at your adjusted income on line 10 of your tax return for 2022. You can then either deduct the standard deduction or total itemized claims from your gross income to obtain your adjusted income.

Next, you can add the standard or itemized deductions and qualified business income, then subtract the total from your adjusted income on line 11 to get your taxable income on line 15. This is the number used to calculate your federal income tax liability: the amount you owe to the Internal Revenue Service or the expected amount of your tax refund.

Impact

Alternative Minimum Tax (AMT)

Income adjustments are not added when calculating the Alternative Minimum Tax (AMT) if you are subject to this tax. The Alternative Minimum Tax is an alternative method of calculating your federal income tax liability, beginning with your adjusted gross income. Income adjustments reduce adjusted gross income, so they can also lower the alternative minimum tax and help you avoid it.

Impact on Other Deductions and Credits

Some detailed tax deductions are limited to the taxpayer’s adjusted gross income. For example, medical expenses can only be deducted to the extent that they exceed 7.5% of your adjusted gross income.

Suppose you have an adjusted gross income of $50,000 for 2022. You have qualified medical expenses of $6,000 for the year. You can deduct your medical expenses to the extent that they exceed 7.5% of your adjusted gross income, or $3,750. Your medical expenses exceed that threshold by $2,250, so you can claim $2,250 of your total $6,000 in expenses as a detailed deduction.

But suppose you also contribute $1,000 to a traditional Individual Retirement Account (IRA) in the same tax year. These contributions are an income adjustment, so they reduce the adjusted gross income by $1,000. Now it’s $49,000. You would have a threshold of $3,675, or 7.5% of $49,000, instead of $3,750 for calculating your medical expense deduction, allowing you to deduct an additional $75 in medical expenses, bringing your total to $2,325 instead of $2,250.

Impact on Other Taxes

Increasing income adjustments can lower other taxes, as some additional taxes are calculated based on adjusted gross income. The 3.8% net investment income tax is partially based on the modified adjusted gross income of the individual over certain thresholds. You can avoid paying this tax if you can reduce your adjusted gross income below those thresholds.

Most tax preparation software is well-equipped to handle all of these scenarios, and you can always seek assistance from a tax professional if you don’t feel capable of handling it yourself.

Frequently Asked Questions (FAQs)

What does it mean if you don’t claim any income adjustments?

Income adjustments reduce the taxable adjusted gross income, so the lower these adjustments, the higher the taxes you may pay.

Can you make income adjustments and claim the standard deduction?

Yes, income adjustments are referred to as “above-the-line deductions,” while standard or itemized claims are called “below-the-line deductions.” They are calculated
Source: https://www.thebalancemoney.com/adjustments-to-income-3192985


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