What is Above the Line Deductions?
Above the line deductions are those deductions that are allowed from the total income of the individual to get the adjusted gross income of an individual tax filling and therefore reduces the tax payable by the individual. These deductions are itemized in Form 1040 (from line 23 to line 35) that is filled by US tax payers as per the guidelines of the IRS.
It helps the taxpayers by reducing their tax liability. Here are the examples:
- Alimony paid
- One-half of self-employment tax paid
- Moving expenses not reimbursed only to a certain extent
- College tuition fees and other related expenses
- Student loan interest
- Deduction on Capital lossesCapital LossesCapital Loss is a loss when the value of the consideration received from the result of the transfer of capital assets is less than the aggregate value of the cost of acquisition & cost of the improvement. In simpler words, it can be stated as the loss derived from the transfer of capital assets.
- Payments to Health Saving Accounts
List of Above the Line Deductions
#1 – Educator Expenses
Under this head, the teachers can claim a standard deduction of $250 as a reimbursement of their expenses on school supplies and other related expenses. Only the kindergarten teachers through 12th Grade working for 900 or more hours in a year can claim this deduction.
#2 – Certain Business Expenses
There was a deduction available for job-related traveling expenses, but these are no longer available.
#3 – Health Saving Account deduction
The contribution made to any health saving plan is deductible expenses. There is a double benefit to taxpayers in this case. The contribution made should be from the pre-tax salary, and also you get the deduction of this contribution in your tax return as well. The Health saving plan should be other than covered by the employer.
#4 – Moving Expenses
The Military persons moving to another place due to change in the station can claim the moving expenses as above the line deductions in their return.
#5 – Deductions for Self-Employed
There are three types of self-employed tax deductions available. First, you can claim half of the self-employment taxSelf-employment TaxSelf-employment tax is the tax towards social security and Medicare, paid by a self-employed person who has net earnings of $400 or more for the concerned tax period towards the federal government reported through form 1040 schedule SE. paid as a deduction in your tax return. Second, you can claim any of the contributions to a self-employment retirement plan as a deduction from your income. Last, you can claim any of the premium paid for yourself and any of the dependents only up to the amount of business income.
For claiming the last deductions, there are two conditions to be taken care of. Firstly, your spouse is working where you both are covered under the employer’s health insurance plan, and secondly, if you are working and covered under the employer’s insurance plan. If you are covered under any of the above two points, then you cannot claim the last deduction.
#6 – Penalty on Early Withdrawal of Savings
Suppose you invested a certain amount in Certificates of depositsCertificates Of DepositsCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank., but after some time, you cashed the certificate before maturity. In this case, banks charge a certain amount of penalty on the early maturity of deposits. This penalty charged by a bank can be claimed as a deduction of your tax return.
#7 – Alimony Paid
This deduction is available for those cases where the divorce was final before 31 Dec 2018, and alimony decision was made. The amount of alimony you pay to your ex can be claimed as an above the line deduction from your income. On the other hand, the person receiving the alimonyAlimonyAlimony is court-ordered financial support in divorce or separation given to a spouse who has a lower level of income or no income at all. Both husband and wife can ask for alimony. As per law, a divorced spouse has the right to live an equal quality of life as when they were married. has to pay taxes on the amount received. The amount of alimony should not include child support expenses.
#8 – IRA Deduction
The amount contributed to an IRA is also eligible as a deduction from the income. There are separate rules on how much you can contribute to an IRA.
#9 – Student Loan Interest Deduction
If you are studying in a college and you have taken a student loan, then you can claim a deduction of $2,500 from the interest you pay on loan. There are certain Adjusted Gross income limits applicable here to calculate the amount to be claimed. If you are a single taxpayerTaxpayerA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws. and your AGI is $85,000, then you cannot claim this deduction. Also, if your AGI pre-student loan interest deduction is $70,000 or more, you cannot claim the full deduction.
Above the line, deductions reduce the Adjusted Gross IncomeAdjusted Gross IncomeAdjusted Gross Income (AGI) is calculated from the gross income. It represents the net income earned by an individual in a year, including wages, capital gains, and retirement distributions after deducting above-the-line deductions. It determines an individual's taxable income by determining deductions or credits a person is eligible to receive., which ultimately reduces the tax liability of the taxpayers. Also, there are certain deductions that are based on your AGI. If your AGI is too high, you won’t be able to claim those deductions. For example, you can claim a deduction of the amount exceeding 10% of the AGI as your medical expense. If your medical expenses are $8,000 and the AGI is $70,000, then you can claim the deduction of only $1,000, but if your AGI is $50,000, then you can claim a deduction of $3,000.
Difference Between Above the line and Below the Line Deductions
- Above the line, a deduction is reduced from the Gross income to arrive at the adjusted gross income figure.
- Below the line deductions are reduced from the adjusted gross income figure arrived after adjusting the above the line deductions.
- Both the deductions ultimately reduce tax liability.
It is very important to understand the deductions available so that one can plan their taxes accordingly. These deductions are called above the line because these are the first deductions available, which help to calculate the AGI, which is the base to calculate various other deductions and finally calculate your tax liability.
This has been a guide to what is Above the Line Deductions and its meaning. Here we discuss examples and list of above the line deductions as per Form 1040 along with its impact. You can learn more about financing from the following articles –