Adjustments, Itemized Deductions, and Credits: Where Does Everything Go on REG?
Place each item inside the tax calculation instead of memorizing three disconnected lists.
Start with gross income
Gross income is reduced by qualifying adjustments to arrive at adjusted gross income, or AGI.
Adjustments to income
Often called above-the-line deductions, adjustments reduce gross income before AGI. Current law and taxpayer facts determine which items qualify and what limitations apply.
Itemized deductions
Itemized deductions occur after AGI. The taxpayer generally compares the allowable itemized deductions with the applicable standard deduction framework.
Credits
Credits reduce tax rather than taxable income. That is why a $1,000 credit can have a larger direct tax impact than a $1,000 deduction.
Refundable vs nonrefundable
Nonrefundable credits generally reduce applicable tax liability only to the extent allowed. Refundable credits can potentially create a refund beyond reducing tax to zero, subject to the specific rules.
Build the tax ladder
Gross income − adjustments = AGI
AGI − applicable deductions = taxable income
Tax before credits − credits = tax after credits
The takeaway
Adjustments change AGI. Itemized deductions reduce income after AGI. Credits reduce tax.
Related Summit guides
FAQ
Is student loan interest itemized?
Under applicable rules it may qualify as an adjustment to income rather than an itemized deduction, subject to limitations.
Does qualified mortgage interest reduce AGI?
It is generally considered in the itemized-deduction framework rather than as an adjustment to income.
Why are credits more valuable than equal deductions?
A credit reduces tax directly while a deduction reduces taxable income.