What are Above the Line Deductions?

Examples

It helps the taxpayers by reducing their tax liability. Here are the examples:

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  • Alimony paidOne-half of self-employment tax paidMoving expenses are not reimbursed only to a certain extentCollege tuition fees and other related expensesStudent loan interestDeduction 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.read morePayments 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 to reimburse their 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

A deduction was available for job-related traveling expenses, but these are no longer available.

#3 – Health Saving Account deduction

There is a double benefit to taxpayers in this case. The contribution made to any health saving plan is deductible expenses. The contribution made should be from the pre-tax salary, and you get the deduction of this contribution in your tax return. The Health savings plan should be other than covered by the employer.

#4 – Moving Expenses

The Military persons moving to another place due to a 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.read more paid as a deduction in your tax return. Second, you can claim any 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 dependents only up to the amount of business income.

For claiming the last deductions, two conditions must 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. You cannot claim the last deduction if you are covered under any of the above two points.

#6 – Penalty on Early Withdrawal of Savings

Suppose you invested a certain amount in Certificates of depositsCertificates Of DepositsA certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period.read more, but after some time, you cashed the certificate before maturity. In this case, banks charge a certain 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 an 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 given to a spouse in case of divorce or separation and is given to the spouse with a lower level of income or no income at all.read more 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 have taken a student loan, you can claim a deduction of $2,500 from the interest you pay on loan. You cannot claim this deduction 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.read more and your AGI is $85,000. Also, if your AGI pre-student loan interest deduction is $70,000 or more, you cannot claim the full deduction. Certain Adjusted Gross income limits apply here to calculate the amount to be claimed.

Impact

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.read more, which ultimately reduces the tax liability of the taxpayers. Also, certain deductions 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, you can claim $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 after adjusting the above-the-line deductions.Both the deductions ultimately reduce tax liability.

Conclusion

It is very important to understand the deductions available so one can plan their taxes accordingly. These deductions are called above the line because these are the first deductions available, which help calculate the AGI, which is the base to calculate various other deductions, and finally, calculate your tax liability.

This has been a guide to Above Line Deductions and their meaning. Here we discuss examples, a list of above-the-line deductions as per Form 1040, and their impact. You can learn more about financing from the following articles –

  • Tobin Tax ExampleCalculate College SavingsTax ShieldAfter-Tax IncomeTax Evasion vs. Tax Avoidance