Unit 11: Adjustments to Gross Income for EA

What are ‘adjustments to income’?

Deductions made before calculating taxable income, reducing the amount of tax owed.

These deductions are reported on Form 1040, Schedule 1, and are often called ‘above-the-line’ deductions.

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What is the purpose of adjustments to gross income?

Reduce taxable income
May increase eligibility for certain credits and deductions

Adjustments are subtracted from gross income to arrive at adjusted gross income (AGI).

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True or False:

Adjustments to gross income are added back when calculating the alternative minimum tax?

False

Unlike other deductions, adjustments to income are not added back when calculating the alternative minimum tax.

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What is the maximum deduction for qualified educator expenses in 2025?

$300 per educator, or $600 for joint returns where both spouses are educators.

Eligible expenses include books, supplies, and certain professional development expenses.

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Who is allowed to deduct employee-related business expenses from their income?

Armed Forces reservists (travel >100 miles)
Qualified performing artists
Fee-basis government officials

These expenses are calculated using Form 2106, Employee Business Expenses.

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What are the requirements to qualify for a Health Savings Account?

(HSA)

Must be covered under a high deductible health plan
Must not be enrolled in Medicare
Cannot be claimed as a dependent on another’s tax return

An HSA must be established exclusively to pay for medical expenses.

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What is the penalty for excess contributions to an HSA?

6% penalty if the excess contributions are not withdrawn.

Contributions exceeding the annual limits are subject to this penalty.

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True or False:

Funds in an HSA expire at the end of the year.

False

Unlike a Healthcare FSA, funds in an HSA do not expire from year-to-year.

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Which moving expenses are deductible for members of the Armed Forces?

Costs of moving under military orders, including spouse, dependents, pets, and household goods.

Expenses already reimbursed by the government cannot be claimed as a deduction.

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What percentage of self-employment tax can be deducted as an adjustment to income?

50%

This deduction is equal to the amount of Social Security and Medicare taxes that an employer normally pays for an employee.

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What types of retirement plans can self-employed individuals contribute to and deduct?

Simplified Employee Pension (SEP) plans
Savings Incentive Match Plan for Employees (SIMPLE) plans
Qualified plans, such as a 401(k)

The business must show a profit for a self-employed taxpayer to contribute to their retirement plan.

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Can a self-employed business owner contribute to an employee’s retirement plan if their business shows a loss?

Yes

A self-employed business owner can contribute to an employee’s retirement plan even if there is a loss on their Schedule C.

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What is the requirement for self-employed health insurance deduction?

Must be self-employed and have a net profit for the year
Be a partner in a partnership with net earnings from self-employment
Have received wages from an S corporation in which the taxpayer was a more-than-2% shareholder

Premiums paid for a spouse and dependents under age 27 are also deductible, limited to the net profits from the business.

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Is a self-employed individual eligible for the health insurance deduction if they have access to an employer-sponsored plan?

If a self-employed individual or their spouse has the option to join an employer-sponsored and subsidized health insurance plan, they are not eligible for the self-employed health insurance deduction.

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When is a penalty for early withdrawal of savings deductible?

It is deductible as an adjustment to income when incurred on a time-deposit account, such as a certificate of deposit (CD).

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Are penalties for early withdrawal from an IRA or retirement plan deductible?

Only penalties for early withdrawal from a time deposit, like a certificate of deposit, are tax-deductible.

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What qualifies as alimony for tax purposes?

Payment to a former spouse under a divorce or separation instrument
Must be made in cash
Can include payments made on behalf of the ex-spouse for expenses

Alimony agreements finalized before 2019 are deductible by the payor and taxable to the payee.

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Is alimony paid for divorces finalized after 2019 deductible?

Alimony paid on divorces finalized after 2019 is not deductible.

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What type of IRA contributions are deductible?

Contributions to a traditional IRA

Contributions to a Roth IRA or nondeductible contributions to a traditional IRA due to income limits are not deductible.

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What conditions must be met to deduct student loan interest?

The loan must be a qualified student loan used solely for higher-education expenses
The taxpayer must have paid the interest
The taxpayer cannot be claimed as a dependent
Married couples must file jointly

The maximum deduction is $2,500 per year, subject to income limitations and phaseouts.

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What are considered qualified higher-education expenses for student loan interest deduction?

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Tuition and fees
Room and board
Books, supplies, and required equipment

These expenses must be reduced by tax-free items used to pay them, such as scholarships or fellowships.

Which legal fees qualify as adjustments to income on Schedule 1?

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Only legal fees related to unlawful discrimination claims or whistleblower awards qualify. Personal legal expenses (e.g. divorce, custody, personal injury) are not deductible.

The deductible amount is limited to the judgment or settlement amount included in income for the tax year.

True or False:

College instructors are eligible for the Qualified Educator Expenses deduction.

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False

Only educators working at least 900 hours in a K-12 school, such as teachers, school counselors, principals, classroom aides, and school coaches, are eligible.

What form is used to calculate deductions for certain business expenses of reservists, performing artists, and fee-basis government officials?

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Form 2106, Employee Business Expenses.

What are the **2025 HSA contribution limits** for self-only and family plans?

* Self-only: $4,300 * Family: $8,550

What are the **new deductions** included in **Schedule 1-A** for tax years 2025-2028?

* Qualified Tips Deduction * Qualified Overtime Compensation Deduction * Qualified Passenger Vehicle Loan Interest Deduction * Enhanced Deduction for Seniors

What must taxpayers complete before claiming any **Schedule 1-A deductions**?

**Part I of Schedule 1-A** to determine Modified Adjusted Gross Income | (MAGI) ## Footnote MAGI is used to determine qualification and phaseouts for Schedule 1-A deductions.

What is the **Qualified Tips Deduction**?

A **deduction for cash tips** received in occupations that customarily and regularly received tips before 2024. ## Footnote Tips must be voluntarily paid by customers and not be mandatory service charges or negotiated amounts.

Which **occupations** are eligible for the Qualified Tips Deduction?

Occupations identified by the IRS as customarily and **regularly receiving tips**. The IRS provides the official list of eligible occupations. ## Footnote Examples include certain occupations in food and beverage service, hospitality, beauty and personal care, recreation, and transportation, but the IRS list controls eligibility.

What are the **limitations** for the Qualified Tips Deduction for married individuals?

Married individuals must file jointly to claim the deduction, and the **$25,000** limit applies to the couple's combined qualified tips. ## Footnote Married taxpayers filing separately are not eligible.

How is the **phase-out** of the Qualified Tips Deduction determined?

The deduction is **reduced by $100 for every $1,000** that the taxpayer’s MAGI exceeds $150,000 ($300,000 for married filing jointly). ## Footnote Partial increments of excess income do not trigger a reduction until they reach a full $1,000.

What is the **Qualified Overtime Compensation Deduction**?

A **deduction** for the **premium portion of overtime pay** required under Section 7 of the FLSA. ## Footnote This generally refers to the 'half' in 'time-and-a-half' for hours worked over 40 in a workweek by nonexempt employees.

What is the **income limitation** for the Qualified Overtime Compensation Deduction?

The deduction begins to phase out once MAGI exceeds **$150,000 for single filers** or **$300,000 for married** taxpayers filing jointly. ## Footnote The deduction is reduced by $100 for every $1,000 that the taxpayer’s MAGI exceeds the threshold.

What is the **Qualified Passenger Vehicle Loan Interest Deduction**?

A deduction for **interest paid on a loan** used to purchase a qualifying personal-use vehicle. ## Footnote The vehicle must be new, have a gross vehicle weight rating under 14,000 pounds, and be for personal use.

Which **vehicles** are eligible for the Qualified Passenger Vehicle Loan Interest Deduction?

* New cars, minivans, vans, SUVs, pickup trucks, or motorcycles. * Vehicles with a gross vehicle weight rating under 14,000 pounds. * Vehicles assembled in the United States. * Vehicles used more than 50% for personal purposes. ## Footnote The vehicle's original use must begin with the taxpayer.

What is the **maximum deduction limit** for Qualified Passenger Vehicle Loan Interest?

$10,000 per return. ## Footnote The $10,000 limit applies separately to each spouse's return for married taxpayers filing separately.

# True or False: Interest on refinanced loans qualifies for the Qualified Passenger Vehicle Loan Interest deduction only if it includes cash-out amounts.

False ## Footnote Interest on refinanced loans qualifies only to the extent of the outstanding balance of the original loan at the time of refinancing, excluding any cash-out amounts.

What is the **income threshold** for the phase-out of the Qualified Passenger Vehicle Loan Interest deduction?

$200,000 for MFJ; $100,000 for all other filing statuses ## Footnote The deduction begins to phase out when Modified Adjusted Gross Income (MAGI) exceeds $200,000 for married taxpayers filing jointly.

# Fill in the blanks: The deduction for Qualified Passenger Vehicle Loan Interest is reduced by $200 for every $1,000 that the taxpayer’s MAGI exceeds the threshold, and any partial increment of excess income counts as a \_\_\_\_\_\_\_ \_\_\_\_\_\_\_.

full increment

What is the **maximum deduction** for the **Enhanced Deduction for Seniors** in 2025 for single filers?

$6,000

What **conditions** must be met for a taxpayer to qualify for the **Enhanced Deduction for Seniors**?

* Must be age 65 or older by the end of the tax year. * Must not be claimed as a dependent by another taxpayer. * Must have a valid Social Security Number issued by the due date of the return including extensions. * Married taxpayers must file jointly to claim the deduction.

What is the **phase-out percentage** for the **Enhanced Deduction for Seniors** based on MAGI?

**6% of the amount** by which MAGI exceeds the threshold.

# True or False: For the Enhanced Deduction for Seniors, a taxpayer born before January 2, 1961, but dying in 2025 before reaching age 65, still qualifies for the deduction.

False ## Footnote For tax purposes, a person is considered to reach age 65 the day before their 65th birthday.

What is the **maximum deduction** for **Qualified Educator Expenses** for a joint return if both spouses are teachers?

$600 ## Footnote The deduction is limited to $300 for each spouse.

# Fill in the blanks: A high-deductible health plan (HDHP) can be combined with a \_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_, allowing the taxpayer to pay for medical expenses on a tax-favored basis.

Health savings account | (HSA)

Who is eligible for a **moving expense deduction** under the **Tax Cuts and Jobs Act**?

Members of the **Armed Forces** moving under military orders or for a permanent change of station.

What is the **self-employment tax rate** used to calculate deductible self-employment tax?

15.30% ## Footnote This includes a 12.4% Social Security tax and a 2.9% Medicare tax, calculated from 92.35% of self-employment net income.

Can a **self-employed taxpayer** contribute to their own **retirement plan** if their business does not show a profit?

No ## Footnote A self-employed taxpayer must have qualifying compensation, typically requiring the business to show a profit, to contribute to their own retirement plan. However, they can contribute to employees' retirement plans even with a loss.

What is the self-employed **health insurance deduction** limited by?

Net profits from the business. ## Footnote The deduction applies to health insurance premiums for the taxpayer, their spouse, and dependents under age 27. It is not available if the taxpayer has access to an employer-sponsored plan.

When can **alimony** paid be deducted on a tax return?

If the divorce was finalized before 2019. ## Footnote Alimony paid under pre-2019 divorce decrees is deductible by the payor and taxable to the recipient. Voluntary payments not required by the decree are not deductible.

What **contributions** are not deductible under the Traditional IRA deduction?

* Contributions to a Roth IRA * Contributions that exceed income limits * Rollover contributions * Contributions for the previous tax year

Unit 11: Adjustments to Gross Income Flashcards

Apply above-the-line deductions to adjust gross income and lower taxable income. (51 cards)