Above-The-Line Deductions: A Simple Guide Bench Accounting

A taxpayer that uses the itemized deduction must have maintained sufficient records to support his or her claimed expenses. Moreover, a taxpayer that files as “married, filing separately” whose spouse itemizes cannot claim the standard deduction. Last, “itemized deductions are How Much Does Bookkeeping Cost For A Small To Medium Sized Business? useful only when and to the extent that they exceed the standard deduction.” If you don’t itemize you can forget about deducting things like charitable contributions. But there are still some tax deductions – known as above-the-line deductions – you can take without itemizing.

Any deduction that’s reported on a line that comes after the AGI calculation on a return is a below-the-line deduction. Therefore, the lower your AGI is, the larger your tax breaks this year will be for these and other itemized deductions. Every year, the Internal Revenue Service (IRS) allows taxpayers to reduce their tax bills by claiming deductions. Deductions help lower your taxable income, enabling you to pay less in taxes. Above-the-line deductions are especially beneficial — they lower your adjusted gross income (AGI). That means most Americans can’t claim some very well-known tax breaks.

Educator expenses

If you were allowed to take deductions on “pre-tax” dollars, it would effectively give you two tax breaks on the same money. Self-employed individuals can deduct the premiums paid for any medical insurance, dental and long-term care insurance. Policies also can cover the worker’s spouse, dependents, and non-dependent children who were under age 27 at the end of last year. What’s more, the IRS has said that Medicare https://accounting-services.net/the-ultimate-guide-to-bookkeeping-for-independent/ premiums paid by self-employed individuals can be taken as an above-the-line adjustment to income. There are some conditions that must be met to claim this deduction; our office can help you report the appropriate amount. With certain high deductible health insurance plans, you can make tax-deductible contributions to an HSA; you can tap these accounts for health care costs without owing income tax.

Above-the-line deductions may also be subject to income-sensitive phaseouts or limitations, e.g., MAGI limits on the tuition and fees deduction. Certain below the line deductions are also phased out for high income taxpayers pursuant to Internal Revenue Code Section 68. Medical and dental expenses are below the line deductions pursuant to Internal Revenue Code Section 67. Because these expenses exceed $10,000 by $1,000, the taxpayer is only entitled to a $1,000 deduction. Above-the-line deductions are also preferred because they can be taken by all taxpayers regardless of whether they take standard or itemized deductions. Moreover, they are desirable because they reduce adjusted gross income (AGI).

Above-The-Line Deductions: A Simple Guide

Because your above-the-line deductions help set the stage for your eligibility for other tax breaks, it’s essential to know what these adjustments are and how you can maximize their value each year. The IRS looks at your level of income to decide which tax credits and deductions you qualify for, and your marginal tax rate. Up to $2,500 of student loan interest is deductible from your gross income provided that your AGI—before subtracting any deduction for student loan interest—is below a ceiling amount. You can claim an above-the-line deduction for up to $2,500 in interest you pay per year on qualifying student loans if you’re pursuing a college education or you’re paying for a dependent or spouse to do so.

• You can find them above the line where you’re required to enter your adjusted gross income.
• Above-the-line deductions are tax benefits that allow you to lower your AGI without having to itemize your deductions.
• With no above-the-line deductions, none of those medical expenses would be deductible, because they don’t exceed 7.5% of your AGI.
• An above-the-line deduction is an amount that may be deducted from gross income on the first page of your tax return before you figure out your adjusted gross income (AGI).
• Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.