CHAPTER 12
Deductions Allowed in Figuring Adjusted Gross Income

Adjusted gross income (AGI) is the amount used in figuring the 7.5% adjusted gross income floor for medical expense deductions (17.1), the 10% floor for personal casualty and theft losses from a federally declared disaster (18.8), and the charitable contribution percentage limitations (14.17).

AGI generally also determines the thresholds for the phaseouts of the child tax credit and the credit for other dependents (Chapter 25).

If you follow the instructions and order of the tax return, you will arrive at adjusted gross income automatically. But if you are planning the tax consequences of a transaction in advance of preparing your return, see the explanation of how to figure adjusted gross income (AGI) (12.1).

There is an advantage in being able to claim deductions directly from gross income (“above-the-line”) in arriving at adjusted gross income, since such deductions are allowed even if you claim the standard deduction rather than itemizing deductions on Schedule A (Form 1040 or 1040-SR). Another advantage of such deductions is that they also reduce state income tax for taxpayers residing in states that compute tax based on federal adjusted gross income. This chapter will explain the deductions that qualify for the direct deduction from gross income.

12.1 Figuring Adjusted Gross Income (AGI)

Adjusted gross income is the difference between gross income in Step 1 and the deductions listed in Step 2.

Step 1. Figure gross income. This is all income received by you from any source, such as wages, salary, tips, gross business income, income from sales and exchanges of property, interest and dividends, rents, royalties, annuities, pensions, etc. But because of exclusions allowed by the tax law, gross income does not include such items as tax-free interest from state or local bonds (4.24), tax-free parsonage allowance (3.13), tax-free insurance proceeds (11.18–11.20), gifts and inheritances (11.4), certain home sale gains (29.1), Social Security benefits that are not subject to tax (34.3), Supplemental Security Income (SSI) (21.5, 34.2), tax-free scholarship grants (33.1), tax-free meals and lodging (3.13), and other tax-free fringe benefits (Chapter 3).

Step 2. Deduct from your 2020 gross income only the following items:

  • Up to $300 of cash charitable contributions; see the Law Alert on this page.
  • Repayment of supplemental unemployment benefits required because of receipt of trade readjustment allowances (2.9)
  • Forfeiture-of-interest penalties because of premature withdrawals (4.16)
  • Capital loss deduction up to $3,000 (5.4)
  • Traditional IRA contributions (8.4)
  • Rent and royalty expenses (9.2)
  • Educator expenses (12.2)
  • Tuition and fees (12.2)
  • 50% of self-employment tax liability (12.2)
  • Health savings account (HSA) contributions (12.2)
  • Health insurance premiums if self-employed or treated as such (12.2)
  • Jury duty pay turned over to your employer (12.2)
  • Performing artist’s qualifying expenses (12.2)
  • Reforestation expenses (12.2)
  • Reservists’ travel costs (12.2)
  • State and local official expenses (12.2)
  • Moving expenses for certain military personnel (12.3)
  • Student loan interest (33.6)
  • Alimony payments under a decree or agreement entered into before 2019 (37.1)
  • Business expenses (40.7)
  • Net operating losses (40.19)
  • Self-employed retirement plan contributions for yourself (41.5)
  • Archer MSA contributions (41.13)

law Law Alert

Up To $300 of 2020 Cash Donations Deductible

The CARES Act allows taxpayers who claim the standard deduction to claim an above-the-line deduction of up to $300 for cash contributions made during 2020 to recognized charitable organizations; See 12.2. The deduction is claimed on Line 10b of Form 1040 or 1040-SR. An extension beyond 2020 will require further legislation; any update will be in the e-Supplement at jklasser.com.

Step 3. The difference between Steps 1 and 2 is adjusted gross income.

12.2 Claiming Deductions from Gross Income

Many deductions taken directly from gross income in arriving at adjusted gross income are first claimed on Form 1040 or 1040-SR schedules devoted to a specific activity, and then the net gain or loss amount for that activity is entered on Form 1040 or 1040-SR. This includes business deductions claimed on Schedule C (Chapter 40), capital losses claimed on Schedule D (Chapter 5), and real estate rental expenses claimed on Schedule E (Chapter 9).

Adjustments to income (above-the-line deductions). Various expenses are claimed as “adjustments to income” on Schedule 1 (Form 1040 or 1040-SR), and then entered on Form 1040 or 1040-SR as a reduction to gross income. These adjustments are sometimes referred to as “above-the-line” deductions and they reduce gross (total) income whether you claim the standard deduction or you itemize on Schedule A. The above-the line deduction for up to $300 of cash donations made in 2020 to charitable organizations is allowed only if you claim the standard deduction, and is claimed directly on Form 1040 or 1040-SR.

Here are the adjustments to income (above-the-line deductions) that may be available on your 2020 tax return:

Up-to $300 of cash charitable contributions. If you claim the standard deduction on your 2020 Form 1040 or1040-SR, and you made contributions in cash during 2020 to qualifying charitable organizations, you may deduct up to $300 of the cash contributions as an above-the-line deduction. Cash contributions to religious and educational organizations, hospitals and publicly-supported charities qualify. Cash contributions to supporting private foundations or donor-advised funds do not qualify. When this book was completed, it was uncertain if Congress was going to enact legislation extending the deduction to years after 2020. See the e-Supplement at jklasser.com for an update.

Educator expenses. If you were a teacher, instructor, counselor, principal, or aide in a private or public elementary or secondary school (kindergarten through grade 12) for at least 900 hours during the school year in 2020, you generally may deduct up to $250 of out-of-pocket costs for books and classroom supplies. Professional development expenses qualify for the deduction, subject to the $250 limit. Eligible supplies include computer equipment (including related software and services), other equipment, and supplementary materials used in the classroom. For courses in health or physical education, supplies must be related to athletics to qualify. Home schooling expenses do not qualify. If you are married filing jointly and you and your spouse both qualify as educators, each of you may deduct up to $250 of your qualified costs, for a $500 maximum on your joint return.

If eligible expenses exceed the $250 limit, the excess is not deductible even if you itemize deductions, as job expenses are not deductible in 2018 through 2025 under the Tax Cuts and Jobs Act (19.2).

The $250 deduction limit may have to be reduced or eliminated completely if certain tax-free amounts are received during the year. The deduction is reduced by tax-free interest on savings bonds used for tuition (33.4), as well as by tax-free distributions from qualified tuition programs (33.5) and Coverdell education savings accounts (33.12).

For 2021, the deduction limit may be raised above $250 by an inflation adjustment; see the e-Supplement at jklasser.com.

Deduction for tuition and fees. The limit on deductible tuition and fees is $4,000 or $2,000, depending on your MAGI and filing status; See 33.13 for details. When this book was completed, it was uncertain if Congress was going to enact legislation extending the deduction to years after 2020. See the e-Supplement at jklasser.com for an update.

Overnight travel costs of Reservists and National Guard members. Armed Forces Reservists and National Guard members who travel over 100 miles and stay overnight to attend Reserve and Guard meetings may deduct their unreimbursed travel expenses as an above-the-line-deduction to the extent of the Federal Government per diem rate for that locality (for lodging, meals, and incidental expenses), plus any parking fees, tolls, and ferry fees. Qualifying expenses are reported on Form 2106 and the deductible amount is entered on Schedule 1 (Form 1040 or 1040-SR) as an above-the-line deduction.

Expenses of performing artists. If you are a performing artist, you may be able to deduct job expenses from gross income, but only if your income is extremely low. You must have:

  1. Two or more employers during the year in the performing arts with at least $200 of earnings from at least two of them.
  2. Expenses from acting or other services in the performing arts that exceed 10% of gross income from such work; and
  3. Adjusted gross income (before deducting these expenses) that does not exceed $16,000.

If you are married, a joint return must be filed to claim the deduction, unless you lived apart from your spouse during the whole year. The $16,000 adjusted gross income limitation (AGI) applies to your combined incomes. If both spouses are performing artists, the $16,000 adjusted income limit applies to the combined incomes, but each spouse must separately meet the two-employer test and 10% expense test for his or her job expenses to be deductible on the joint return.

Clearly, the $16,000 AGI limit is so low that few taxpayers will qualify for the above-the-line deduction. The $16,000 AGI limit has been in the law since 1986. If you qualify, you report the performing artist expenses on Form 2106 and enter the unreimbursed amount on Schedule 1 (Form 1040 or 1040-SR) as an above-the-line deduction.

If you do not meet tests 1-3 above, the expenses are not deductible even if you itemize deductions, as job expenses are not deductible in 2018 through 2025 (19.2).

State and local officials. State and local officials paid on a fee basis may deduct from gross income unreimbursed business expenses (20.1).

Health savings account (HSA) deduction. If you are self-employed and have coverage under a high-deductible health plan, are not entitled to Medicare benefits, and are not the dependent of another taxpayer, you generally can deduct contributions to an HSA within the limits discussed in 41.10. If you are an employee, and your employer has contributed less than the applicable limit to an HSA on your behalf, you may contribute the balance and deduct it from gross income (3.2).

Moving expenses if an Armed Forces member. Moving expenses are deductible by active-duty members of the U.S. Armed Forces who move pursuant to a military order that is incident to a permanent change of station; see details at 12.3.

Deductible part of self-employment tax. After you figure your self-employment tax liability on Schedule SE, the deductible portion shown on Schedule SE is an adjustment to income on Schedule 1 (Form 1040 or 1040-SR); See 45.3–45.4, 45.7.

Contributions to self-employed SEP, SIMPLE, and qualified plans. See Chapter 41 for details on deducting these retirement plan contributions.

Self-employed health insurance deduction. If you were self-employed with a net profit in 2020, you may deduct from gross income 100% of premiums you paid in 2020 for medical and dental insurance, and qualified (see below) long-term-care insurance, for yourself, your spouse, your dependents, and your children who at the end of the year are under age 27 (whether or not your dependents). The instructions to Schedule 1(Form 1040 or 1040-SR) and IRS Publication 535 (Business Expenses) have worksheets for figuring the self-employed health insurance deduction.

You are treated as self-employed for purposes of the 100% deduction if you are a general partner with net earnings, a limited partner receiving guaranteed payments, or a more-than-2% shareholder in an S corporation from which you received wages.

As a sole proprietor, you may claim the 100% above-the-line deduction whether the policy is purchased in your own name or the name of the business. If you are a more than 2% shareholder-employee of an S corporation, the IRS position is that the S corporation must “establish” the health plan, but the plan can be considered “established” by the S corporation even if you obtain the policy in your own name, so long as (1) the corporation makes the premium payments to the insurance company or the corporation reimburses you for premiums you pay, and (2) the premiums are reported as wages on your Form W-2 and on your tax return. Similarly, if you are a partner, a health plan in your name is considered “established” by the partnership if (1) the partnership pays the premiums or you pay them and are reimbursed by the partnership, and (2) the partnership reports the premiums as guaranteed payments on Schedule K-1 (Form 1065) and you include the payments as income on your tax return.

Medicare premiums qualify for the 100% deduction, since they provide insurance that constitutes medical care. As with other health insurance premiums, premiums paid for Medicare coverage of your spouse, dependents, and children who at the end of the year are under age 27 may be included in the 100% deduction

If you have a qualified long-term-care policy, the 100% deduction applies to the premiums that would be deductible as an itemized deduction under the medical expense rules. This amount depends on the age of each person covered, as shown in 17.15. For example, if in 2020 you paid long-term care premiums for yourself and your spouse, and both of you are age 57 at the end of 2020, premiums of up to $1,630 for each of you are includible in the 100% deduction, assuming the policy is a qualifying long-term care policy (17.15).

Restrictions on the 100% deduction. The 100% deduction may not exceed your net profit from the business under which the health premiums are paid, minus the deductible part of your self-employment tax liability and your deductible contributions to self-employed, SEP, or SIMPLE, and qualified retirement plans.

The 100% health insurance deduction may not be claimed for any month that you were eligible to participate in an employer’s subsidized health plan, including a plan of your spouse’s employer or a plan of the employer of your dependent or child under age 27 at the end of the year. If the deduction would be barred for any month because of such eligibility and you have long-term-care coverage that is not employer subsidized, you may claim the 100% deduction for the portion of the long-term-care premiums that is deductible for your age (17.15).

Are you entitled to the premium tax credit? There is a deduction complication if you are also entitled to the premium tax credit for purchasing health insurance on a government exchange (25.12). The computations are interrelated because the amount of the credit affects the computation of the above-the-line deduction and the credit is based in part on adjusted gross income, which reflects the allowable deduction. Publication 974 (Premium Tax Credit) has worksheets for making the computations. If you or your professional tax preparer use tax preparation software, the software will make the circular computations to figure the deduction and the credit.

Penalty on early savings withdrawals (4.16). If you lost interest because you made an early redemption of a savings certificate, the penalty shown on Form 1099-INT or 1099-OID is an above-the-line deduction.

Alimony paid. You can deduct alimony that you paid to your former spouse under a pre-2019 divorce or separation agreement provided that he or she reports the payments as taxable income; see Chapter 37.

Traditional IRA contribution. The deductible limits, including the phaseout rules for individuals covered by employer retirement plans, are explained in 8.3–8.4.

Student loan interest. You may be able to deduct interest you pay on a qualified student loan, up to a $2,500 limit, subject to a phaseout based on modified adjusted gross income (33.13).

Attorney fees in employment discrimination cases. Attorney fees and court costs in actions involving unlawful discrimination claims are deductible as an adjustment to income, but only to the extent of the amount included in income as a result of the judgment or settlement (11.7). The deduction is claimed on Line 22 of Schedule 1 (Form 1040 or 1040-SR); identify the deduction as “UDC”.

Archer MSA contribution. If you are self-employed or employed by a qualifying small business and have high-deductible health coverage, a deduction for contributions to an Archer MSA account may be deductible. The deduction is figured on Form 8853 and then entered on Line 22 of Schedule 1 (Form 1040 or 1040-SR); identify the deduction as “MSA” (41.13).

Jury duty pay turned over to employer. If you receive your regular pay while on jury duty and turn over your jury duty fees to your employer, report the fees as “Other income” on Schedule 1 ( Form 1040 or 1040-SR) and claim an offsetting adjustment to income on Line 22 of Schedule 1; label it “Jury pay”.

Repayment of supplemental unemployment benefits. You may claim a deduction from gross income for the repayment or in some cases a tax credit (2.9). Claim the deduction as an adjustment to income on Line 22 of Schedule 1 (Form 1040 or 1040-SR) and on the adjacent dotted line write the amount and label it “subpay TRA” (trade readjustment allowances).

Reforestation amortization. If you do not have to file Schedule C or F to report income from a timber activity, an amortization deduction for qualifying reforestation expenses may be claimed over an 84-month period; see Code Section 194 for details. On Line 22 of Schedule 1 (Form 1040 or 1040-SR), the amortization deduction should be labeled “RFST.”

Costs incurred in obtaining whistleblower award from the IRS. You may claim an above-theline deduction for costs you incurred, including attorneys’ fees, in connection with obtaining a whistleblower award from the IRS as an informant, up to the amount of the award reported as income. On Line 22 of Schedule 1 (Form 1040 or 1040-SR), label the deduction as “WBF.”

Nontaxable Olympic and Paralympic medals and prize money. Olympic and Paralympic athletes are not taxed on the value of the medals won and prize money received from the U.S. Olympic Committee unless they have adjusted gross income exceeding $1,000,000, or $500,000 if married filing separately (11.1). The prize money and the value of medals won must be reported as “Other income” on Schedule 1 (Form 1040 or 1040-SR) even if the athlete qualifies for the exclusion. However, where the exclusion applies, the reported income is offset by an adjustment to income claimed on Line 22 of Schedule 1 (Form 1040 or 1040-SR); label the deduction “USOC.”

12.3 Moving Costs Are Deductible Only by Qualifying Members of the U.S. Armed Forces

The only taxpayers who may deduct unreimbursed moving expenses for 2018 through 2025 are members of the U.S. Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. These qualifying Armed Forces members are also the only taxpayers who may exclude employer allowances or reimbursements for eligible moving expenses (2.1).

Qualifying Armed Forces members report deductible moving expenses on Form 3903. The excess of deductible moving expenses over excludable government allowances or reimbursements, as shown on Form 3903, is entered as an adjustment to income (above-the-line deduction on Line 13 of Schedule 1 (Form 1040 or 1040-SR).

If you are a qualifying member of the U.S. Armed Forces, you may claim the following moving expenses on Form 3903:

  1. Traveling costs of yourself and members of your household en route from your old to the new locality. Here, you include the costs of transportation and lodging for yourself and household members while traveling to your new residence. This includes lodging before departure for one day after the old residence is unusable and lodging for the day of arrival at the new locality.

    If you use your own car, you may either deduct your actual costs of gas, oil, and repairs (but not depreciation) during the trip or take a deduction based on the IRS standard mileage rate. For 2020, the IRS standard mileage rate for moving expenses is 17 cents per mile; the rate may change for 2021; see the e-Supplement at jklasser.com. Also add parking fees and tolls. Meal expenses are not a deductible moving expense.

  2. The actual cost of moving your personal effects and household goods. This includes the cost of packing, crating, and transporting furniture and household belongings, in-transit storage up to 30 consecutive days, insurance costs for the goods, and the cost of moving a pet or shipping an automobile to your new residence. You may also deduct expenses of moving your personal effects from a place other than your former home, but only up to the estimated cost of such a move from your former home.

Nondeductible moving expenses. Meal expenses while traveling to your new residence are not deductible.

You may not deduct the cost of pre-move house-hunting trips, temporary living expenses, or expenses of selling, purchasing, or leasing the old or new residence, such as attorneys’ fees, real estate fees, mortgage penalties, expenses for trips to sell your old house, a loss on the sale of the house, or costs of settling an unexpired lease. If you have to pay a fee to get out of your apartment lease when you move, the fee is not a deductible moving expense. If you have self-employment income and part of your apartment was a qualifying home office, you may be able to claim an allocable part of the lease cancellation fee as a home office deduction; See 40.12.

Other nondeductible costs include the cost of travel incurred for a maid, nurse, chauffeur, or similar domestic help (unless the person is also your dependent), the cost of transporting furniture that you purchased en route from your old home, expenses of refitting rugs and drapes, forfeited tuition, car tags or driver’s license for the state you move to, or forfeited club membership fees.