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ACC 20 Chapter 4 Discussion

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ACC 20 Chapter 4 Discussion

From the chosen question, the paper looks forward to drawing a distinctive line between

the two tax-related deductions (above-the-line and below-the-line deductions) with a clear

meaning of the term line. To begin with, personal or business expense deductions can be defined

as any spending or item subtracted from an employee's gross income during payroll. Wallace and

Edwards (2019) described deductions as "any expenses that can be subtracted from the Adjusted

Gross Income (AGI) of a taxpayer with the intents to reduce the taxable amount of income.” The

“line”, on the other hand, is the financial term for the Adjusted Gross Income. Adjusted Gross

Income, according to Korb, Williams and Flach (2020), is "a preliminary amount attained

through calculations on tax returns after attaining the taxable income plus the taxable profits on

the Schedule C and then subjected to reduction with several specific above-the-line deductions."

Above-the-line deductions can be defined as the deductions taken by a taxpayer before

the determination of the AGI, thus the name, adjustments to income as they reduce one AGI and

tax liability. On the other hand, below-the-line deductions are the itemized deductions that are

deducted after the determination of an employee’s AGI. Kahn, Romney and Treu (2022) defined

below-the-line deductions as “the income or expense items in the profit and loss statement that

are exceptional and extraordinary.” Therefore, the below-the-line deductions are from the

already-determined gross income. In addition, above-the-line deductions are valuable compared

to below-the-line deductions, which engrave various limitations and are less invaluable than

above-the-line.

A substantial reason to categorize some deductions as above-the-line or below-the-line

can be attained by providing examples of both. With above-the-line, the types include the

contributions related to a taxpayer's retirement and health savings accounts. There are also
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several above-the-line deductions available for self-employed individuals like “simplified

employee pension plans, paid health insurance premiums, savings incentive match program for

employees, retirement benefit plan contributions, deductions for one-half of self, alimony

payments, and employment taxes owed.” On the other hand, the examples of below-the-line

deductions include “qualified interest such as the mortgage interest, investment interest if it

surpasses the investment income, and student loan interest, medical expenses of above 7.5%,

qualified charitable donations, annuity losses, cooperative housing payments, and bond payments

among others.” In other terms, as affirmed by Kahn, Romney and Treu (2022), “below-the-line

deductions include all the ordinary and necessary expenses paid or incurred during a taxable year

for maintenance of property held for the income production, conservation, or management.”

A tremendous reason for classifying some deductions as defined by the Internal Revenue

Code (IRC) depends on an in-depth understanding of above-the-line and below-the-line

deductions, which is crucial. The differences between the two deductions include; above-the-line

deductions are reported on Schedule 1 of Part II of an employee's 2021 Form 1040, whereas

below-the-line deductions are presented on Schedule A of Form 1040. Below-the-line (itemized)

deductions, in order to be used, a taxpayer must meet specific distinctive criteria as opposed to

above-the-line deductions that are adjusted before a taxpayer’s below-the-line. To conclude,

deductions bear above-the-line deductions because they are deducted to determine AGI. On the

contrary, some deductions are called below-the-line deductions as they are deducted to determine

the taxable income after the AGI has been determined and are accompanied by certain

limitations with the basis of the AGI of a taxpayer.

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References

Kahn, J., Romney, M., & Treu, J. (2022). Too much salt? the nuanced impact of the state and

local tax deduction cap on pass-through business taxpayers. Florida Tax Review, 25(1).

https://doi.org/10.5744/ftr.2021.1008

Korb, P. J., Williams, J. L., & Flach, A. E. (2022). Qualified Business Income Deduction and the

Self-Employed: Utilizing the Deduction Before It Sunsets. The CPA Journal, 92(5/6), 6-

7. https://www.proquest.com/openview/8940c3710b4ea3a5878040ea822bffba/1?pq-

origsite=gscholar&cbl=41798

Wallace, S., & Edwards, B. M. (2019). Personal income tax. Handbook on Taxation, pp. 149–

190. https://doi.org/10.4324/9781315093161-8