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Adjustments to income are expenses that reduce your total, or gross, income. You enter income adjustments directly onto Form 1040 of your tax return. The amount remaining after deducting these expenses is "adjusted gross income." Adjustments to income reduce your tax bill but are not itemized deductions, which you list separately on Schedule A and Schedule C. That means you benefit from adjustments to income whether you itemize deductions or take the standard deduction.
Above the Line
Adjustments to income are "above-the-line" deductions because they appear on page one of Form 1040, above the line that reports your adjusted gross income. Contrast these adjustments to "below the line" deductions, which appear on page two of Form 1040. There are two types of below-the-line deductions. The first is the standard deduction, which in 2015 is $6,300 per individual. The second type is itemized deductions that you list on separate tax forms and summarize the amount on Form 1040, below the adjusted gross income line. If your itemized deductions exceed your standard deduction, you'll pay less tax by itemizing.
Contributions to Tax-Deductible Accounts
Several adjustments to income stem from contributions you make to certain tax-deductible accounts, such as individual retirement accounts (IRAs), qualified employer plans -- for example, 401k's and 403b's -- and health savings accounts (HSAs). For 2014 and 2015, you can contribute up to $5,500 of your annual income to a traditional IRA -- $6,500 if you're age 50 or older -- and deduct the
contribution as an income adjustment, subject to certain limitations if you also contribute to a qualified employer plan. The contribution limits on other retirement accounts vary but normally exceed those for IRAs. For 2015, an individual can deduct up to $3,350 in contributions to HSAs, which are accounts you can use to help pay for medical expenses.
Adjustments for the Self-Employed
Certain adjustments to income apply to self-employed individuals. Self-employment tax consists of Social Security and Medicare taxes. As a self-employed individual, you must figure and pay this tax yourself. The 2014 self-employment tax rate is 15.3 percent of your gross income, but you can deduct half of the tax as an adjustment to income. Self-employed individuals can also adjust gross income for the cost of health insurance and for contributions to self-employed retirement plans, such as a simplified employee pension or a personal 401(k).
Other adjustments to gross income include moving expenses, certain business expenses for reservists, any penalties paid for an early withdrawal of savings from, for example, a certificate of deposit, and alimony paid. Subject to certain requirements, you can deduct up $2,500 of interest you paid on student loans and up to $4,000 in tuition and fees. Quicken includes a Tax Planner Tool that allows you to enter and calculate your adjustments to income. You also can assign Quicken transactions to particular tax categories, such as adjustment to income, and export the information to your tax preparation software when preparing your return.