Question

With the exception of rent/royalty expenses, investment interest expense are deductible ___ AGI, while self-employed business expenses are deductible ___ AGI.

Answer 1

Investment interest expenses are deductible above AGI, while self-employed business expenses are deductible below AGI.

Step-by-step explanation:

Investment interest expenses are considered above-the-line deductions, meaning they are subtracted from the taxpayer's gross income to arrive at the adjusted gross income (AGI). This deduction is subject to specific limitations based on the taxpayer's net investment income. By allowing the deduction above the AGI line, it provides a more favorable tax treatment, potentially impacting the taxpayer's overall tax liability.

On the other hand, self-employed business expenses are categorized as below-the-line deductions. These expenses are considered adjustments to income and are deducted after the AGI has been calculated. Self-employed individuals report their business expenses on Schedule C, and the total is subtracted from their income to determine the taxable income. This approach allows for a reduction in the taxpayer's taxable income, potentially lowering the amount subject to income tax.

Understanding the distinction between above-the-line and below-the-line deductions is essential for taxpayers as it affects the calculation of the adjusted gross income and, subsequently, the taxable income, influencing the overall tax liability.