Above the Line Deduction
Expenses deducted to calculate a taxpayer's adjusted gross income (AGI). These differ from itemized deductions, which are amounts deducted from the determined AGI. Above the line deductions constitute income adjustments made whether or not itemized deductions are made on the federal tax return.
Above the Line Deduction Details
Above the line deductions are designed to reduce taxpayer income before applying the standard deduction or itemizing deductions on federal income tax returns. Making these adjustments helps individuals arrive at their adjusted gross income.
AGI is the foundation for determining taxable income, tax bracket, and tax rate. Taxpayers do not have to itemize to take advantage of tax deductions. This is because above the line tax deductions can help lower tax bills without the extra paperwork of itemizing deductions.
Because a taxpayer's above the line deductions help set the stage for eligibility for other tax breaks, it is essential to know what these adjustments are and how to maximize their value each year.
Real World Examples of Above the Line Deductions
Individual Retirement Account (IRA) Deduction
An IRA is an essential component for taxpayers' retirement-saving and tax-planning strategies. Filers who contribute to an IRA don't have to itemize to deduct that income from their taxes. The best thing to do is consider it an above the line deduction to benefit from it even if they decide to use the standard deduction.
Health Savings Account Deduction
If taxpayers enroll in a high-deductible health insurance plan, contributions made to their health savings account, called an HSA, can be written off as above the line deductions. Their health savings account is a dedicated investment account for qualified medical expenses.
If a taxpayer has an HSA, their employer may allow them to fund it directly from payroll deductions. Those would be pretax deductions and wouldn't count as income when calculating certain payroll taxes such as Social Security and Medicare taxes. What one would report on their Schedule 1 tax form would be any outside-of-payroll contributions to HSA, which will reduce their adjusted gross income but won't prevent payment of additional payroll taxes on the amount.
Student Loan Interest Deduction
An above the line deduction can help reduce an individual's pesky student loan bill. If a taxpayer repaid eligible higher education loans in 2018, they could deduct up to $2,500 in interest as an above the line deduction.
Filers who earned more than specific phase-out amounts are not eligible to receive this benefit. The thresholds are between a modified AGI of $65,000 to $80,000 for single filers and $135,000 to $165,000 if one is married filing jointly.
Educator expense deduction
Qualified teachers can get a deduction of up to $250 (or $500 if married filing jointly and they are both teachers) in the form of an above the line deduction with no itemizing needed. Typical expenses can include books, supplies, and computer equipment. Teachers claiming this deduction ought to keep receipts of the amount of unreimbursed supplies.
Self-employed taxpayers can reduce the employer share of their payroll taxes, contributions to eligible self-employed retirement plans, and certain contributions to health insurance. The rules for setting up and claiming these plans appropriately on taxes are complicated; therefore, it is advisable for taxpayers to consult a professional.
Even though the Tax Cuts and Jobs Act nixed the alimony deduction for future divorces, if one has a divorce in effect from before 2018, they will still be able to deduct alimony payments from their taxes.
Moving expenses for armed forces deduction
Previously, if one moved to a new location for work, they could deduct eligible moving costs. Due to tax reforms, this deduction is now only available to qualified members of the armed forces.
In general, these above the line deductions are available to qualified taxpayers, regardless of whether they itemize. One should keep receipts related to these contributions throughout the year and start thinking about using them to reduce their adjusted gross income in future tax years.
Significance of Above the Line Deductions
An above the line deduction reduces the amount of income subject to federal income tax. Reducing one's taxable income could ultimately lower tax obligation. The more a taxpayer knows about the different adjustments available, the easier it will be to create a strategy to maximize their value.
As an individual's income grows, maximizing above the line deductions along the way can help keep down tax bills.
Deductions are just one way to reduce an individual's tax burden. Above the line deductions are vital in calculating a taxpayer's AGI; one ought to take some time to find out which provisions they qualify for and how they can maximize adjustments that will ultimately inform their gross income. Taxpayers can claim above the line deductions on lines 10-20 of Form 1040.
Above the Line Deductions vs. Below the Line Deductions
Below-the-line deductions are the everyday expenses that one is most familiar with. They include business mileage, rent, and office supplies. Adjustments made on an individual's gross income to calculate AGI are above the line deductions. Other deductions applied to the AGI are below the line deductions.
Deductions reported after the AGI calculation on a return is a below the line deduction. These do not include personal and dependent exemptions that taxpayers take, and they are not affected by the AGI like itemized deductions are.
An example would be if one incurs deductible medical and dental expenses during the year, the total deduction amount reported on Schedule A is limited to the amount that exceeds 7.5 percent of one's AGI.
If a taxpayer has job-related and other miscellaneous expenses to report on Schedule A, they should understand that their total deduction is reduced by 2 percent of their AGI. Therefore, the lower one's AGI is, the larger their deduction will be for these and other itemized deductions.