RESPONSE

B)Why are some deductions called “above the line” deductions and others called “below the line” deductions? What is the “line?”

Tax laws provide two different types of deductions in the individual tax formula. One is “for” adjusted gross income deductions which is reference to “above the line” deductions. The other one is “from” adjusted gross income deductions which is reference to “below the line” deductions.  The line is the adjusted gross income. Above the adjusted gross income is the amount that are subtracted from gross income. Below the adjusted gross income is the amount subtracted from AGI to calculate taxable income.

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2)

A. How do two taxpayers determine who has priority to claim a person as a dependent if the person is qualifying child of two taxpayers, when neither taxpayer is a parent of the child (assume the child does not qualify as a qualifying child of either parent).  

To be claimed as a dependent, the individual needs to be a citizen of the United States, Canada or Mexico. In addition, the individual must not file a joint return with his or her spouse unless there is no tax liability on the couple's joint return and there would not have been any tax liability on either spouse's tax return if they had filed separately. Also, the individual must be considered either a qualifying child or a qualifying relative of the tax payer. In this case, we know this individual in a qualifying child, which indicates he or she satisfies four tests, including relationship test, age test, residence test, and support test. According to the textbook, in circumstances when a qualifying child could be claimed as dependent to more than one taxpayer, the priority is based on tiebreaking rules. Since no parent is involved in this scenario, we should follow tiebreaking rule number three, which states "if the child is a qualifying child of more than one nonparent, the child is the qualifying child of the nonparent with the highest AGI." So the between the two taxpayers, the one with the higher AGI has the priority to claim this qualifying child as dependent.

B. Why are some deductions called “above the line” deductions and others called “below the line” deductions? What is the “line?” 

The tax laws provide for two distinct types of deductions in the individual tax formula, for adjusted gross income (AGI) deductions and from AGI deductions. Congress identifies whether the deductions are for or from AGI when it enacts legislation that grants deduction. For AGI deductions are referred to as "deductions above the line", which tend to be deductions associated with business activities and certain investment activities, for example, alimony prepaid, health insurance deductions for self-employed taxpayers, business expenses, etc. From AGI are referred to as "deductions below the line", which include itemized deductions, standard deductions, and the qualified business income (QBI) deductions. The "line", therefore, is AGI.

Reference:

Spilker,B &Ayers,B &Barrick, J& Robinson, J& Weaver, C &Worsham, R &Outslay,McGraw-Hill  Book Company. (2021). “McGraw-Hill's taxation of individuals and business entities” 12th edition