Anytime you hear the word “deduction” in connection with taxes, you know it’s a good thing. Above-the-line deductions, technically called adjustments to income, are the best of the best. You can take these deductions in addition to claiming the standard deduction or itemized deductions. “Above the line” means they’re subtracted before you make any other tax calculations.
Your Adjusted Gross Income
Your adjusted gross income, or AGI, is the end result after you subtract all the above-the-line deductions you qualify for from your gross income. A lot can depend on your AGI. Your eligibility for several other tax breaks depends on this number. The Internal Revenue Service figures that you earn too much if your AGI is too high, so you shouldn’t be able to take advantage of these tax breaks.
Your AGI is where calculating your taxable income begins. You’re not taxed on your gross income – everything you earn plus unearned income such as capital gains, interest and dividend income. Your tax bill is based on what’s left after you take all available deductions.
Your Modified Adjusted Gross Income
You might also have heard the term “modified adjusted gross income,” commonly referred to as your MAGI. Eligibility for certain tax breaks sometimes depends on your MAGI, not always your AGI. Your MAGI is your AGI with one or more above-the-line deductions added back in.
You obviously can’t base your eligibility for an above-the-line adjustment to income on the income remains after you take the deduction if you’re hoping to qualify for a certain above-the-line deduction, so that deduction is typically added back for eligibility purposes. This rule applies to several tax credits as well, including the Child Tax Credit and the two education-related credits.
Read More: How Much Do You Get Back for a Child on Your Taxes?
Above-the-line deductions, technically called adjustments to income, are the best of the best. You can take these deductions in addition to claiming the standard deduction or itemized deductions.
Health Savings Account Contributions
You might qualify for one of the above-the-line tax deductions if you contribute to a health savings account,. These are the plans where your invested money grows tax-free and you can eventually use it to pay for dental, prescription, medical and vision expenses.
Eligibility depends on being enrolled in a high-deductible health insurance plan. You’re limited to an overall contribution limit of $3,550 for the year as of 2020 if you're single. This increases to $3,600 in 2021, and you get an extra $1,000 in "catch-up" contributions if you're age 55 or older.
You can’t deduct any contributions made by your employer because these aren’t included in your taxable income to begin with. You should receive a Form 1099-SA citing the amounts you can deduct, and you must file Form 8889 with your tax return to claim this deduction.
Retirement Plan Contributions
You can also claim an above-the-line deduction for a portion of some retirement plan contributions you might make during the year, such as to a traditional individual retirement arrangement. The amount you can deduct depends on the type of plan and other factors. Roth and SIMPLE IRAs don’t qualify.
This is one of those deductions where the amount you can claim depends on your MAGI as well. You can determine your MAGI for purposes of the retirement plan contributions deduction by adding back any foreign earned income and foreign housing exclusions you’ve deducted on your tax return, savings bond interest, the student loan interest deduction and any adoption benefits your employer might have paid for you.
This deduction also depends on whether you – or your spouse if you’re married – participate in a retirement account sponsored by your employer. You must be younger than age 70½ at the end of the tax year to be able to make IRA contributions, and you have to have taxable income to qualify.
Read More: The Best Retirement Plans
The Student Loan Interest Deduction
This is a popular deduction for those who are financing their way through post-secondary school. You can claim up to $2,500 in interest you pay during the tax year on qualified student loans for yourself, your dependents or even your spouse, as of 2020. You must be personally and contractually liable for repaying the loans in question.
There are income limits for this deduction as well. The amount you can deduct will begin reducing until your eligibility is eventually phased out or eliminated altogether if your MAGI is too high.
You can’t claim this deduction if you’re married and file a separate tax return, and loans from anyone who’s related to you or from an employer plan don’t count. You – or your spouse if you’re married – can’t be claimed as a dependent on anyone else’s tax return. You should receive a Form 1098-E from the lender showing the amount of interest you paid if it was $600 or more.
The Tuition and Fees Deduction
This above-the-line deduction expired at the end of 2017, but then it was resuscitated by the Taxpayer Certainty and Disaster Relief Act. The legislation renewed it retroactively for 2018 and 2019 and extended it at least through 2020.
This is another deduction that depends on your adjusted gross income. It can range from $2,000 to $4,000 of your qualifying expenses, depending on how high your MAGI is.
This above-the-line deduction applies to the flip side of education – it’s for teachers. It’s just a little one, but every dime helps. You can subtract up to $250 of what you personally spend on classroom supplies or on continuing education, such as professional development courses, as of 2020.
The deduction doubles to $500 if both you and your spouse are teachers and you file a joint married return, but it’s still no more than $250 for each of you. In other words, if one spouse spent $400 and the other spent $100, you can't claim a $500 above-the-line deduction. You’d be limited to $350 in this case – the $250 limit for one spouse and $100 for the other. And you can’t claim any amounts for which your school reimbursed you.
You must be a teacher, aide, principal, counselor or instructor working at a learning institution that teaches grades kindergarten through 12. Home schooling doesn’t qualify. You must have worked at least 900 hours during the academic year.
Self-Employment Tax Breaks
Self-employed persons have their own cache of above-the-line deductions. These include half the self-employment tax – Medicare and Social Security taxes for those who work for themselves – as well as contributions to self-employed retirement plans and self-employed health insurance premiums for yourself and your family.
The amount you can claim for premiums is limited to your profit after business expenses from self-employment work, less your deduction for half the self-employment tax.
Eliminated and Changed Deductions
Unfortunately, two above-the-line deductions have been eliminated or nearly eliminated by tax reform. The Tax Cuts and Jobs Act restricts the moving expenses deduction to certain members of the military from 2018 through 2025. Your move must be the result of a military order and a permanent change of station.
It used to be that if you paid alimony, the IRS figured this was taxable income to your ex, not to you. You could take an above-the-line deduction for what you paid. Not anymore, at least not for payments made pursuant to a divorce or separation agreement or decree entered after December 31, 2018. Payments made according to earlier agreements and decrees still qualify.
Read More: Claiming Dependents for Your Taxes
- TaxAct: Itemized Deductions vs. Above-the-Line Deductions
- Bankrate: How to Cut Your Taxes Using Above-the-Line Deductions
- IRS: Adjustments to Income
- IRS: Topic Number 450 – Adjustments to Income
- TurboTax: What Is Adjusted Gross Income?
- H&R Block: What Is Modified Adjusted Gross Income
- IRS: Publication 969 (2018)
- United Healthcare: 2020 HSA Guidelines
- SHRM: IRS Announces 2020 Limits for HSAs and High-Deductible Health Plans
- Cordasco & Company: Student Loan Interest – Can You Deduct It on Your Tax Return?
- IRS: Topic No. 458 Educator Expense Deduction
- Friedman Accountants and Advisors: Post Tax Reform Rules for Deducting Business Travel, Job Relocation, Meals and Entertainment
- Concannon, Miller & Co.: 10 Renewed Tax Breaks for Individuals Taxpayers in 2020
- IRS. "Topic No. 502 Medical and Dental Expenses." Accessed June 4, 2020.
- IRS. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed June 4, 2020.
- IRS. "CLARIFICATION: Changes to Deduction for Certain Alimony Payments Effective in 2019." Accessed June 4, 2020.
- IRS. "IRA Deduction Limits." Accessed June 4, 2020.
- IRS. "Publication 970 (2019), Tax Benefits for Education." Accessed June 4, 2020.
- IRS. "Topic No. 458 Educator Expense Deduction." Accessed June 4, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.