Adjustments to income are often referred to as above-the-line deductions because of their physical placement on IRS Form 1040. These deductions are listed above the line that calculates adjusted gross income (AGI), hence the name “above the line.” This position differs from itemized deductions, which are listed below the AGI on tax forms.
Adjustments can be valuable to your tax strategy because they directly reduce taxable income. Some examples of above-the-line deductions include specific contributions to retirement accounts, student loan interest payments, or educator expenses. This article will guide you through the most common above-the-line deductions and how to claim them on your return.
What are above-the-line deductions?
What makes above-the-line deductions unique and useful is that they are expenses you can deduct before calculating your adjusted gross income. Above-the-line deductions differ from other deductions, such as the standard deduction, in a few key ways:
- How much you can deduct: While the standard deduction is a fixed amount set by the IRS based on filing status, above-the-line deductions allow you to subtract specific expenses directly from your gross income. You are not limited to a fixed amount of adjustments – you can claim as many as you qualify for.
- Who can deduct: Unlike itemized deductions that you can only claim if you elect to itemize, above-the-line deductions are available to all taxpayers, regardless of whether they itemize deductions or claim the standard deduction.
- When you deduct: Above-the-line deductions are subtracted from your total income before calculating AGI. Compared to itemized deductions, which are subtracted after calculating your AGI.
By reporting above-the-line deductions, you can reduce your AGI. The IRS uses your AGI to determine your taxable income and eligibility for several credits and deductions, which means claiming eligible above-the-line deductions can allow more tax breaks and a lower tax liability.
For example, the IRS allows you to claim an itemized deduction for medical expenses. However, you can only claim the qualifying costs that exceed 7.5% of your AGI. Before claiming any adjustments, let’s say your AGI is $100,000, and you have $7,500 in medical expenses.
$7,500 (medical expenses) – $7,500 (7.5% of AGI)
= $ 0 deduction
Without adjustments, you would not be eligible to claim a deduction for your medical expenses because they do not exceed 7.5% of your AGI. Now, let’s say you can claim $20,000 in adjustments that reduce your AGI to $80,000.
$7,500 (medical expenses) – $6,000 (7.5% of AGI)
= $1,500 deduction
You can reduce your AGI and qualify for more tax breaks by claiming these adjustments.
Common above-the-line deductions
Student loan interest
One of the most common above-the-line deductions is for interest paid on student loans. This deduction offers taxpayers up to $2,500 in interest paid on qualified student loans – making it a valuable tax break for taxpayers with student loan debt. To qualify, you must have taken the loan out for qualified education expenses and meet certain income requirements. If you have paid $600 or more in student loan interest, you should receive Form 1098-E, Student Loan Interest Statement, from the loan provider.
Health Savings Account (HSA)
Another significant above-the-line deduction is for contributions to a Health Savings Account (HSA). An HSA is a tax-exempt savings account designed to help individuals save money for medical expenses. The contributions made by you or your employers are tax-free. Additionally, those distributions are tax-free when you access funds from an HSA account for qualified medical expenses. For tax year 2023, you are allowed to contribute the following amounts to an HSA:
- $3,850 for individual health plans
- $7,750 for family health plans
IRA contributions
If you set aside money for retirement in a Traditional IRA (Individual Retirement Account), you may be eligible for this common above-the-line deduction. Traditional IRAs allow individuals to contribute pre-tax dollars, which can grow tax-deferred until withdrawals are made in retirement. This means you will only pay taxes once you begin to pull money out of the account. This deduction encourages retirement planning and allows you an immediate tax break.
The maximum deduction for IRA contributions is $6,500 – this amount may vary based on income limits and contributions made to other retirement accounts. For those eligible to deduct contributions to a Traditional IRA, you can typically do so in the tax year for which the contribution is made. However, you can also deduct contributions made up until the tax filing deadline for that year, typically April 15 of the following year.
Educator expenses
Teachers and eligible educators may qualify for an above-the-line deduction for certain out-of-pocket classroom expenses. This deduction allows educators to deduct up to $300 ($600 if married filing jointly and both spouses are eligible educators) of unreimbursed expenses for books, supplies, computer equipment, and other materials used in the classroom.
Self-employed health insurance premiums
Self-employed individuals can deduct the cost of health insurance premiums as an above-the-line deduction. This deduction applies to health, dental, and long-term care insurance premiums paid for themselves, their spouses, and dependents. It’s a valuable tax benefit for entrepreneurs and freelancers, helping offset the high cost of health insurance without employer-sponsored coverage. To qualify, you must meet certain criteria, including being self-employed and not eligible for subsidized health insurance through an employer.
Above-the-line deduction FAQs
Do you still have questions? Get quick answers to above-the-line deduction questions here.
How do you calculate above-the-line deductions?
Above-the-line deductions are adjustments subtracted from your total income and determine your adjusted gross income. You’ll subtract adjustments from the total income reported on line 9 of Form 1040.
Are itemized deductions above or below the line?
Informally, taxpayers may refer to itemized deductions as below-the-line deductions since they are subtracted after the AGI is calculated. While these deductions can reduce your taxable income, they do not impact your AGI.
Are there any deductions you can take without itemizing?
Yes! Whether you opt for the standard deduction or itemize your deductions, you can deduct these expenses:
