Adjustment to Income vs. Standard Deduction

1040 and 1040A filers may claim the standard deduction.

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The U.S. tax code permits taxpayers to reduce their taxable income by accounting for certain expenses. If they use Form 1040 or 1040A while filing taxes, they can also claim an additional standard, or even higher, itemized deduction. On the other hand, the IRS lists other types of revenue that increase taxable income. Your filing status determines which credits and other subtractions you may use to adjust your income. Likewise, your profitable financial transactions might raise your tax liability.

Adjusted Gross Income

Your income may go through several phases of adjustment as you complete your tax return. The IRS officially calls your adjusted gross income the figure that appears in line 4 of Form 1040EZ, line 21 of the 1040A and line 37 of the 1040. Although the revenue agency defines AGI as gross income minus qualified expenses, when you look at form 1040EZ, you see that its AGI refers to a total of gross income, taxable interest and unemployment compensation — line 4 excludes deductions — you received. Thus, adjustments to income in the early section of your tax return drive your taxable income down or up. But what is known as “standard deduction” and is reported on page two of Form 1040 and 1040A always lowers your taxable earnings.

Subtractions and Additions

You may be able to adjust your income down if you incur educator expenses, make contributions to an IRA or other retirement plan, pay student loan interest, tuition and fees, and have a few other qualified expenses. Your taxable earnings go up when you receive interest and dividends, capital gains, unemployment benefits, retirement plan distributions, and investment and self-employment income, among other financial gains. Since many of these items come with exceptions, consult an accountant as you prepare your tax return.

Standard Deduction

The adjustments you make to your gross income to calculate your AGI do not apply to every taxpayer: Not everyone pays student loan interest or has business income, for instance. On the other hand, if you file Form 1040 or 1040A, you are automatically eligible to take the standard deduction, reducing your AGI and tax liability. The IRS calculates this subtraction based on inflation and the taxpayer’s filing status. For these reasons, different standard deductions exist and they often increase from year to year.

Itemized Deduction

It is also worth noting that certain taxpayers qualify for itemized deductions, subtractions the tax code allows in place of, not concurrently with, the standard deduction. Anyone who incurs qualified expenses, such as mortgage interest and medical bills that combined are higher than the standard deduction, is better off itemizing their deductions in Schedule A. Doing so reduces their tax liability to the lowest bracket for which they are eligible. It is a good idea to check with an accountant as to whether you have expenses that qualify for itemization.

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About the Author

Emma Watkins writes on finance, fitness and gardening. Her articles and essays have appeared in "Writer's Digest," "The Writer," "From House to Home," "Big Apple Parent" and other online and print venues. Watkins holds a Master of Arts in psychology.

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