Module 1 · Tax Formulas and Credits · Lesson 3 of 10
Above-the-line deductions and AGI
Adjustments to income, and why AGI is the most important number on the return.
In this lesson · about 14 minutes
- List the common adjustments to income
- Calculate AGI, including the deduction for half of self-employment tax
- Explain why lowering AGI is worth more than lowering taxable income
Adjustments to income, such as educator expenses, student loan interest, traditional IRA contributions, HSA contributions and one-half of self-employment tax. Anyone who qualifies can take them, itemizing or not.
Schedule 1, Part II → line 10
There are two families of deductions on a return. The ones taken before AGI are called adjustments to income, or "above-the-line" deductions because they sit above the AGI line (line 11 of Form 1040). The ones taken after AGI are the standard or itemized deductions, covered in the next lesson.
Adjustments are specific deductions the law allows anyone who qualifies to take, whether or not they itemize. Most are reported on Schedule 1, Part II.
| Adjustment | Who it helps | 2025 key limit |
|---|---|---|
| Educator expenses | K–12 teachers, aides, counselors buying classroom supplies | Up to $300 each |
| Student loan interest | People paying on qualified student loans | Up to $2,500, phased out at higher incomes |
| Traditional IRA contributions | Savers, especially without a workplace plan | Up to $7,000 ($8,000 at 50+). Deduction can be limited if covered by a workplace plan |
| Health savings account (HSA) | People with a high-deductible health plan | Contributions made outside payroll |
| One-half of self-employment tax | Freelancers and sole proprietors | Half of the Schedule SE tax |
| Self-employed health insurance | Self-employed people paying their own premiums | Up to the business profit |
| SEP, SIMPLE and solo 401(k) contributions | Self-employed retirement savers | Based on self-employment earnings |
Worked example
Tomas has a day job and a side business
Tomas is single. He earned $45,000 in wages and made a $20,000 profit from weekend photography. He paid $1,800 in student loan interest and put $4,000 in a traditional IRA (he has no workplace plan, so it is fully deductible).
Calculator
AGI builder
Enter a client's income and adjustments. Self-employment tax is calculated for you.
Capped at $300.
Capped at $2,500. Phase-outs not applied.
Capped at $7,000. Assumes it is fully deductible.
Limited to business profit.
Adjustments of $7,213 lower AGI by 11.1%. Remember the client still owes the full $2,826 of SE tax.
Federal, tax year 2025, simplified for learning. Not tax advice.
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For learning only, not tax advice. Figures are federal for tax year 2025 and simplified; phase-outs and special rules are not all shown. Check current IRS instructions before preparing a return.