Net income provides a more accurate account of the financial status. Here’s why.
What are adjustments to income?
Adjustments to income are tax deductions someone can take for income she earned that can’t be taxed. Considered “above-the-line” deductions because they’re calculated before the adjusted gross income line on the tax form, adjustments to income determine a taxpayer’s actual gross income before applying standard, “below-the-line” deductions and help her reduce the amount of income she can be taxed on.
On the Internal Revenue Service’s Form 1040, there are two pages to list deductions. Those “above the line,” on page one, calculate the taxpayer’s adjusted gross income (AGI).
Taxpayers have to list all their income on their tax forms, but they can adjust the gross amount by subtracting certain types of tax-deductible deposits and expenses.
Those permitted deposits and expenses include the following categories:
- Education: Above-the-line deductions apply to certain educational expenses incurred by both students and teachers. Not only can teachers write off purchases they made to help them teach, but students can also subtract both tuition and student loan interest payments from their taxable income.
- Employment: A taxpayer can deduct any expenses incurred in the capacity of running her own business, but not those incurred while working an employee for someone else.
- Certain savings accounts: Pre-tax contributions to certain savings accounts, such as individual retirement accounts (IRAs) and employer-linked plans like a 401(k), can be deducted above the line.
- Medical expenses: While these are usually deducted from the AGI, some deposits to health-savings accounts (HSAs) are considered eligible adjustments to income.
- Legal obligations: Alimony payment can be written off as adjustments to income. So can any jury duty pay an employee remits to her employer, which she might do if she continues earning regular income while serving on a jury.
Deductions made against the AGI are called standard, or “below-the-line,” deductions.
Let Bankrate help you prepare your new checking account for the tax refund you’ll get from these deductions.
Adjustments to income example
Stacey graduated college last year and has $30,000 in student loan debt. This year, her loan accrues interest at the fixed-rate amount of 6.8 percent. Her monthly payments are about $354, including interest of about $24. At the end of the year, she’s paid $288 in interest, which she subtracts from her income to calculate her adjusted gross income.