CARL WATTS & ASSOCIATES

August 20, 2018

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The Tax Cuts and Jobs Act and the
Above-the-Line Deductions
  • IRA contributions. Contributions to IRA accounts (subject to annual threshold limits) may be deductible, depending on your income.

  • 50% of self-employment taxes. If you’re self-employed, you can deduct half of the 12.4% Social Security tax on net self-employment income, up to an annual ceiling, and a 2.9% Medicare tax on all net self-employment income.

  • Penalty on early savings withdrawals. You can deduct from your income penalties you had to pay to banks and other financial institutions because you withdrew your savings early from certificates of deposit or similar accounts.

  • Student loan interest. Up to $2,500 of student loan interest is deductible from your gross income provided that your AGI—before subtracting any deduction for student loan interest—is below a ceiling amount.

  • Tuition and fees. Depending on your income, you may deduct up to $4,000 in higher education tuition and fees you pay for yourself, your spouse, or a dependent. However, this deduction is not allowed if the American Opportunity tax credit or Lifetime Learning Credit is claimed.

  • Alimony. You can also subtract amounts you paid in alimony, that is, a court- ordered payment to a separated spouse or divorced ex-spouse. You can’t include child support payments. For more details, see IRS Publication 504, Divorced or Separated Individuals. The TCJA eliminates this deduction starting in 2019 for any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the TCJA applies).


  • Moving Expenses for Armed Forces members. Members of the Armed Forces on active duty (or their spouse or dependents) who move pursuant to a military order and incident to a permanent change of station may deduct their moving and storage expenses.

  • Domestic production activities. This very specific line item is for taxpayers in the construction, farming or even some artistic fields (films and recordings).


If you venture to take a closer look at Form 1040 instructions, you will discover that you can add here many more possible adjustments to income, even if some of them are for relatively limited tax situations. Some of these adjustments to income include: attorney fees and other legal costs, jury duty pay if you gave the pay to your employer, contributions by certain chaplains to section 403(b) plans, and so on.

Remember, if you want to keep up with the changes of the new tax law and maximize your deductions, it is best to talk to a tax professional who can guide you to use deductions efficiently and legally.

In the meantime, to find out more details about Tax Cuts and Jobs Act’s substantial impact to US tax returns, stay tuned to our regular newsletters.

While we are patiently waiting for the IRS regulations and detailed rules following the Tax Cuts and Jobs Act (TCJA), we can offer you some more general information on deductions that are still in place in 2018 and beyond. These include some above- the-line deductions that you may be used to.

As you know, the federal tax deductions are a way to decrease your taxable income and thus reduce the amount of tax you owe to the federal government, while tax credits, on the other hand, are a direct reduction of the tax due.


It is also of general knowledge that, depending on your personal circumstances, you can either take the standard tax deduction, or the itemized deduction. But maybe not all of you know that the standard or the itemized deductions are below-the-line deductions and that there are a number of above-the- line deductions also referred to as adjustments to income or as pre-tax deductions.

Adjustments to income are called above-the-line deductions because they appear on Form 1040, above the line that reports your adjusted gross income (AGI). As a matter of fact, the very definition of AGI is gross income minus adjustments to income.

Above-the-line deductions are considered to be more advantageous than below-the- line ones because they can play an important role not only in how much you pay in taxes, but also in determining your itemized deduction amounts, the amount of various credits you will qualify for, and any earned income that you are entitled to.

You can take adjustments to income in addition to your standard deduction or itemized deductions and these deductions are not added back when calculating the alternative minimum tax.

Above-the-line deductions may also refer to expenses that are claimed on Schedule C (Business income); Schedule D (Capital gain or loss); Schedule E (Income from rental real estate, royalties, partnerships, S corporations, trusts; and Schedule F (Farm income). These above-the-line deductions are not included among the adjustments to income and may be taken into consideration when calculating the alternative minimum tax.


The reason behind the adjustments to income is, on one hand, the government’s awareness that some expenditures are necessary to be able to earn income (or earn more income), and on the other hand to create an incentive for people to be responsible with their money and plan ahead for certain eventualities (including health care expenses and retirement).

Here are the adjustments to income that are still valid for your 2018 Form 1040:

  • Self-employed health insurance. People who are self-employed can deduct health insurance premiums up to the amount of the profit from the business.

  • Health savings account contributions. You can deduct Health Savings Account (HSA) contributions you make with personal funds.

  • Retirement plan contributions by self-employed taxpayers. These include annual contributions made by self-employed people to their retirement plans, such as SEP-IRAs, SIMPLE IRAs, Keogh plans, and solo 401(k) plans.
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