The individual tax formula
Gross income − adjustments = AGI − (greater of standard or itemized deductions) − QBI deduction = taxable income → apply rates → subtract credits → tax due.
Common above-the-line adjustments
- Educator expenses; HSA contributions
- Deductible portion of self-employment tax (half); self-employed health insurance; self-employed retirement plan contributions
- Traditional IRA contributions (subject to phase-outs if covered by an employer plan)
- Student loan interest (limited and phased out)
- Alimony paid under pre-2019 agreements
IMPORTANT — AGI is the gateway. Many deductions and credits phase out based on AGI, so an above-the-line adjustment is worth more than an itemized deduction of the same size — it reduces AGI and therefore expands other benefits.
Major itemized deductions
| Category | Rule |
|---|---|
| Medical expenses | Deductible only to the extent they exceed 7.5% of AGI |
| State and local taxes (SALT) | OBBBA raised the cap to $40,000 (temporarily; scheduled to revert to $10,000 in 2030) |
| Home mortgage interest | On acquisition indebtedness up to applicable limits |
| Charitable contributions | Cash to public charities generally up to 60% of AGI; capital gain property to public charities up to 30% of AGI; 5-year carryforward |
| Casualty losses | Only for federally declared disasters |
The QBI deduction (§199A)
OBBBA made §199A permanent at 20% of qualified business income from pass-through entities, and added a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from an active trade or business in which they materially participate. Above income thresholds, limitations based on W-2 wages and the unadjusted basis of qualified property apply, and specified service trades or businesses (SSTBs) phase out entirely.
EXAM TIP: QBI is deducted after AGI, along with (not instead of) the standard or itemized deduction. It does not reduce self-employment tax.