What Are Above-the-Line Deductions?

What Are Above-the-Line Deductions?
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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 certain 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 over 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 rather than 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 that remains ​after​ you take the 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 two education-related credits.

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 ​$3,600​ for the year as of tax year 2021 if you're single. This is the tax return you'll file in 2022. 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.

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 2021. 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 and filing a joint return – 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.

Educator Expenses

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 the IRS figured it was taxable income to your ex, not to you, if you paid alimony. You could take an above-the-line deduction for what you paid, and your ex had to report it as taxable income on their return. 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.