Above the line deduction

In the United States, an above the line deduction is a term used to describe those deductions which the Internal Revenue Service allows a taxpayer to subtract from his or her gross income. These deductions are set forth in Internal Revenue Code Section 62. A taxpayer's gross income minus his or her above the line deductions is equal to the adjusted gross income. Because these deductions are taken before adjusted gross income is calculated, they are termed "above the line."

Impact

Above the line deductions are generally more advantageous for a taxpayer than so-called below the line deductions. Below the line deductions are subtracted from a taxpayer's adjusted gross income. Above the line deductions are not subject to income-sensitive phaseouts or limitations. Certain below the line deductions, by contrast, are phased out for wealthy taxpayers pursuant to Internal Revenue Code Section 68. Additionally, certain below the line deductions may be taken only if they exceed a certain percentage of adjusted gross income. Medical and dental expenses are, for example, below the line deductions pursuant to Internal Revenue Code Section 67. These expenses may only be deducted, however, to the extent they exceed 7.5% of a taxpayer's adjusted gross income. See, Internal Revenue Code Section 213. Accordingly, if a taxpayer had an adjusted gross income of $100,000 and medical expenses of $8,000, he or she would only be entitled to deduct the amount by which these expenses exceed 7.5% of $100,000, or $7,500. Because these expenses exceed $7,500 by only $500, the taxpayer is only entitled to a $500 deduction.

Above the line deductions are also preferred because they can be taken by ALL taxpayers regardless of whether they take standard or itemized deductions (see attached tax ladder). Moreover, they are desirable because they reduce adjusted gross income (AGI). Generally, the smaller the AGI, the greater the percentage of deductibility of itemized deductions.

History

List of the above the line deductions

Internal Revenue Code Section 62(a)(2)(A) states that the following items are allowable as above the line deductions:

*Reimbursed employee expenses
*Certain expenses of performing artists
*Certain expenses of state officials
*Certain expenses for books and supplies incurred by teachers
*Certain expenses for Army Reserve members
*Losses from sale of property
*Expenses from producing rental or royalty income
*Certain deductions of life tenants and income beneficiaries of property
*Retirement plan savings for the self-employed
*Penalties forfeited because of premature withdrawal of funds
*Alimony payments
*Reforestation expenses
*Required repayments of supplemental unemployment compensation
*Jury duty pay given to the employer
*Clean fuel vehicles
*Moving expenses
*Archer Medical Savings Accounts
*Interest on student loans
*Higher Education expenses
*Health savings accounts

Formulas

*Adjusted gross income (AGI) = Gross Income IRC (61)(a) - Above the line Deductions (62)(a)
*Taxable income = AGI - Personal Exemptions (151) - Standard Deduction 63(c) or Itemized Deductions 63(d)

External links

*usc|26|62, Cornell Law School


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