Tax Code 62: Defining Your Adjusted Gross Income

The Internal Revenue Code contains thousands of sections, but Section 62 is foundational to an individual’s tax return. This part of the tax law provides the list of deductions that can be subtracted from a person’s total income to arrive at their adjusted gross income. These deductions, often called “above-the-line,” are available to taxpayers regardless of whether they choose to take the standard deduction or to itemize their other expenses.

Defining Adjusted Gross Income

Adjusted Gross Income (AGI) represents a taxpayer’s gross income from all sources minus a specific list of deductions. Gross income is the starting point, encompassing all money earned from wages, investments, and business activities. AGI provides a more refined measure of a person’s financial resources than gross income alone.

This AGI figure is a threshold for determining eligibility for numerous tax credits and other deductions. The ability to claim education credits, such as the American Opportunity Credit, can be limited or eliminated based on AGI levels. Similarly, the amount of the Child Tax Credit a family receives is directly tied to their AGI, with the credit phasing out as income rises.

AGI also governs the availability of certain itemized deductions. The deduction for medical expenses, for instance, is only available for costs that exceed 7.5% of the taxpayer’s AGI, meaning a lower AGI makes it easier to surpass this threshold. AGI is distinct from taxable income, which is the final number used to calculate tax owed and is found by subtracting either the standard or itemized deductions from AGI.

Allowable Above the Line Deductions

Deductions for Self-Employed Individuals

Individuals who work for themselves are responsible for paying both the employee and employer portions of Social Security and Medicare taxes. To account for this, the tax code allows a deduction for one-half of the self-employment taxes paid during the year. This adjustment effectively puts self-employed individuals on more equal footing with employees, whose employers pay a matching share of these taxes.

Self-employed individuals can also establish and contribute to certain retirement plans, with those contributions being deductible. A Simplified Employee Pension (SEP) IRA allows contributions up to the lesser of 25% of compensation or $70,000 for 2025. A SIMPLE IRA allows an employee to contribute up to $16,500 in 2025, with an additional catch-up contribution for those age 50 and over.

A qualifying self-employed individual can deduct 100% of the premiums paid for medical, dental, and qualifying long-term care insurance for themselves, their spouse, and their dependents. A primary rule for this deduction is that the taxpayer cannot be eligible to participate in an employer-sponsored health plan, including one offered by a spouse’s employer. The deduction is also limited to the net profit of the business.

Deductions for Employees and Reservists

Eligible educators can deduct up to $300 of unreimbursed expenses they pay for classroom materials in 2025. If two spouses are both eligible educators and file a joint return, they can deduct up to $600, but no more than $300 per person. An eligible individual must be a K-12 teacher, instructor, counselor, principal, or aide who works at least 900 hours during a school year.

Certain business expenses for specific categories of employees are also deductible. Members of the Armed Forces reserves can deduct unreimbursed travel expenses for traveling more than 100 miles from home to perform their duties. Qualified performing artists and certain fee-basis state or local government officials can also deduct their business expenses.

Savings and Investment-Related Deductions

Contributions to a Health Savings Account (HSA) are deductible for individuals covered by a high-deductible health plan. For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage. Individuals age 55 or older can make an additional “catch-up” contribution of $1,000 per year.

If a financial institution charges a penalty for the early withdrawal of funds from a time savings account, such as a certificate of deposit (CD), that penalty is deductible. The amount of the penalty is reported to the taxpayer by the financial institution on Form 1099-INT.

Contributions to a traditional Individual Retirement Arrangement (IRA) may be deductible. For 2025, the maximum contribution is $7,000, or $8,000 for those age 50 or older. The deductibility of these contributions depends on whether the taxpayer or their spouse is covered by a retirement plan at work and their modified adjusted gross income (MAGI). For 2025, a single person covered by a workplace plan will see their deduction phased out with a MAGI between $79,000 and $89,000. For married couples filing jointly where the contributing spouse is covered, the phase-out range is $126,000 to $146,000.

Education-Related Deductions

Taxpayers who pay interest on a qualified student loan may be able to deduct the amount of interest paid, up to a maximum of $2,500 per year. This deduction is available even if the taxpayer does not itemize. The loan must have been taken out solely to pay for qualified higher education expenses for the taxpayer, their spouse, or a dependent.

The student loan interest deduction is subject to a phase-out based on the taxpayer’s MAGI. For 2025, the deduction for single filers will phase out with a MAGI between $85,000 and $100,000. For joint filers, the range will be between $170,000 and $200,000. Taxpayers with MAGI above these upper limits cannot claim the deduction.

Calculating and Reporting Your AGI

Taxpayers claim these above-the-line deductions on Schedule 1 of Form 1040, titled “Additional Income and Adjustments to Income.” Part II of this schedule provides specific lines for each type of adjustment, such as the educator expense deduction, HSA contributions, and student loan interest.

After entering the amounts for all applicable deductions, the taxpayer totals them on Schedule 1. This total represents the full amount of the taxpayer’s adjustments to income for the year. This figure is then transferred to the main Form 1040 and subtracted from the taxpayer’s total gross income to determine the final Adjusted Gross Income.