What Are Above The Line Deductions?

Tax deductions reduce your taxable income, but not all deductions are created equal. Above-the-line deductions can be more valuable than below-the-line deductions because they can help you qualify for other deductions or increase their value.

Both above-the-line and below-the-line deductions reduce the amount of your income that’s subject to federal income taxes. So take some time to review the rules for claiming these deductions or discuss them with your tax advisor.

The more you know about the types of deductions available to you, the easier it is to identify tax planning strategies to maximize their value and ultimately lower your tax bill.

This article explains what tax deductions are, the types of deductions you may be able to claim on your tax return, and why above-the-line deductions are so valuable.

What Does ‘Deduct’ Mean?

Deduct is another way of saying subtract, and in the context of your federal income tax return, a deduction is an expense that you subtract from your gross income to arrive at how much of your income is taxable.

When you file your federal income tax return, you can use several categories of deductions to lower your tax bill.

Above-the-Line Deductions

Above-the-line deductions, officially known as “adjustments to income,” are subtracted from your gross income before calculating your adjusted gross income (AGI). This makes them particularly useful because many other tax deductions and credits have income limits based on your AGI.

For example, if you itemize deductions, you can deduct out-of-pocket medical expenses that exceed 7.5% of your AGI. So claiming above-the-line deductions that lower your AGI makes more of your medical expenses deductible.

To illustrate, say your gross income is $100,000, and you have $7,500 of out-of-pocket medical expenses due to a hospital stay. With no above-the-line deductions, none of those medical expenses would be deductible, because they don’t exceed 7.5% of your AGI.

However, if you had $20,000 worth of above-the-line deductions, your AGI would be $80,000, and you could deduct expenses over $6,000 ($80,000 x 7.5%) or $1,500 of medical expenses.

You claim above-the-line deductions in Part II of Schedule 1. They include:

  • Up to $250 of unreimbursed expenses for educators who work in schools
  • Business expenses of reservists, performing artists, and fee-based government officials
  • Contributions to a health savings account (HSA)
  • Moving expenses for members of the Armed Forces.
  • The deductible part of self-employment tax.
  • Contributions to self-employed SEP, SIMPLE, and qualified retirement plans.
  • Health insurance premiums for self-employed people
  • Penalties on early withdrawal of savings
  • Alimony payments (for divorce agreements dated before Dec. 31, 2018)
  • Contributions to a traditional IRA
  • Up to $2,500 of student loan interest
  • Contributions to an Archer MSA

Starting with 2020 tax returns, you have the option of claiming some charitable contributions as an above-the-line deduction.

Congress authorized the above-the-line charitable deduction as part of the 2020 CARES Act. In 2020 tax returns, the deduction was worth up to $300 per return.

For 2021 tax returns, it’s more generous, allowing a $300 deduction for single filers and $600 for married couples filing a joint return.

However, this deduction is limited compared to claiming gifts to charity as an itemized deduction. It’s only available for cash donations, including those made with currency, checks, debit and credit cards, and electronic funds transfer. In other words, you can’t claim an above-the-line donation for property, such as clothing or household items.

You can find more details and rules for claiming these above-the-line deductions in the Form 1040 Instructions.

Below-the-Line (Itemized) Deductions

Beneath the line for AGI on your tax return, you have the option of claiming the standard deduction or itemizing.

Roughly 90% of taxpayers claim the standard deduction, an amount pre-determined by the IRS based on your filing status. For 2021 tax returns, the available standard deductions are:

  • $12,550 for single filers and married individuals filing separate returns
  • $18,800 for heads of household
  • $25,100 for married couples filing a joint return

However, if you have many itemized deductions, then tracking them throughout the year and claiming them on Schedule A might make more sense. If your total itemized deductions are greater than the standard deduction available for your filing status, you’ll generally choose to itemize.

Itemized deductions include:

  • Out-of-pocket medical expenses that exceed 7.5% of your AGI
  • Up to $10,000 of combined state and local taxes, including property taxes and state and local income taxes OR state and local sales tax
  • Interest paid on up to $750,000 of home mortgage debt
  • Charitable contributions
  • Casualty losses due to a federally declared disaster

Read more: How Kentucky tornado victims can apply for FEMA aid

There’s also a catchall section for other itemized deductions. These are less common but include things like:

  • Gambling losses
  • Amortizable bond premiums, which are the excess amount paid for a bond over its face value, and deductible over the life of the bond
  • Impairment-related work expenses for people with disabilities, such as the cost of paying someone to help you at work, private transportation to work, or medical devices related to your condition, such as a wheelchair or hearing aid

You can find more details and rules for claiming itemized deductions on the IRS Instructions for Schedule A.

More from Forbes Advisor