Reduce Your Taxable Income With Above-the-Line Deductions

Many Americans record their charitable contributions, mortgage interest, property taxes, and other expenses each year, hoping to clear the dollar threshold that will enable them to claim itemized deductions that are greater than the standard deductions.

But don’t worry if you don’t cross that threshold. You can declare other deductions even if you don’t itemize. These deductions are called above-the-line deductions. Below, you’ll find some of the most common deductions that fall into this category along with some specialized ones.

Tax Deductions: An Overview

A tax deduction is an amount of money you can use to lower your gross taxable income. Deductions come in many different shapes and sizes.

The Internal Revenue Service (IRS) caps the amount of money you can claim based on the type of deduction. For instance, if you’re claiming medical expenses, you can only deduct the amount that exceeds your adjusted gross income (AGI) by 7.5%.

As noted above, you have two options when claiming deductions: itemizing them or taking the standard deduction. Most people choose to take the standard deduction because they don’t have enough expenses to make itemizing them worthwhile.

If you want to itemize, you must ensure that your deductions exceed the standard deduction based on your tax filing threshold. These limits, which are adjusted annually for inflation, generally increase slightly each year and vary based on your tax filing status.

But what if you can’t itemize? Don’t fret. You can still claim certain deductions even when you take the standard deduction.

What Are Above-the-Line Deductions?

Above-the-line deductions are expenses that are used to calculate your AGI. To determine your AGI, these deductions are added together and then subtracted from your gross taxable income. Remember that these deductions are not the same as the deductions that you itemize. Itemized deductions (and the standard deduction) are dollar amounts that are deducted from your AGI.

Use Schedule 1 to report above-the-line deductions and calculate the total. The amount from line 10 of Schedule 1 is then transferred to line 8 of Form 1040 or Form 1040-SR.

Most Common Above-the-Line Deductions

Retirement Plan Contributions

All contributions made to traditional individual retirement accounts (IRAs) and qualified plans such as 401(k), 403(b), and 457 plans are deductible.

Taxpayers with higher incomes who contribute to a traditional IRA and an employer-sponsored plan may face limits on how much of their IRA contributions they can deduct. These limits phase out once their income passes certain thresholds. These limits vary by filing status and whether either spouse takes part in an employer plan. The IRS updates these phaseout ranges every year, so be sure to check out the current year’s limits.

Student Loan Interest

Interest that’s paid on federal student loans is deductible up to a certain amount. Anyone who pays more than $600 in student loan interest should receive Form 1098-E: Student Loan Interest Statement. You are allowed to deduct up to $2,500 or the total amount of interest paid—whichever is lower.

You can claim this deduction if you meet all of the following requirements:

• You paid the interest during the tax year
• The interest paid was on a qualified student loan
• You aren’t married filing separately
• You (or your spouse if you file jointly) aren’t claimed as dependents on another individual’s returns

At various thresholds, your modified adjusted gross income (MAGI) will determine whether the deduction is full, reduced, or eliminated:

• If you have a lower MAGI, you may qualify for the full deduction.
• If you have a moderate income, you may be able to claim a reduced deduction
• If you have a high income, you may not qualify for any deductions.

These limits are adjusted annually for inflation each year. Make sure you verify whether your income level allows you to qualify for the deduction

Tuition and Fees

In some cases, it is more advantageous for taxpayers to deduct the costs of tuition and other educational expenses paid to qualified educational institutions than to claim an educational tax credit.

Healthcare-Related Expenses

All contributions to Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs) are fully deductible, as long as taxpayers do not have access to any kind of group policy coverage, including that offered by fraternal or professional organizations. The purchase of a qualified high-deductible health insurance policy is also required.

Business Expenses

Virtually any expense related to the operation of a sole proprietorship is deductible on Schedule C. This includes rent, utilities, the cost of equipment and supplies, insurance, legal fees, employee salaries, and contract labor. This also includes one-half of the self-employment tax that must be paid on this income.

Other Above-the-Line Deductions

• Alimony: Payments that are not classified as child support and are made to a spouse pursuant to a divorce decree usually count as alimony. These payments are deductible from your gross income unless they are “made under a divorce or separation agreement executed after Dec. 31, 2018,” or were modified in certain ways after that date. If your divorce agreement predates that date, check with your accountant to confirm that alimony payments are still deductible.
• Domestic Production Activities: Up to 9% of activities related to the domestic production of certain goods or services, such as engineering or architectural concerns, were able to be deducted under certain conditions. However, this deduction expired at the end of 2017 and was replaced by the qualified business income deduction.
• Early Withdrawal Penalties: Any penalties paid for the early withdrawal of money from a CD or savings bond that is reported on Form 1099-INT or 1099-DIV can be deducted.
• Educator Expenses: These include unreimbursed qualified expenses of up to $300 ($600 for joint filers if both fall under this category). Qualified expenses include teaching supplies, books, and other ordinary expenses commonly associated with education. This deduction is available to educators who teach grades K-12 who work at least 900 hours during the year.

The Bottom Line

Any or all of these above-the-line deductions can be taken even if you take the standard deduction. Of course, there are rules and limitations that must be observed. For more information on above-the-line deductions, read the instructions for Form 1040 on the IRS website or consult your tax advisor.