What Are Above-the-Line Deductions?

Definition and Examples of Above-the-Line Deductions

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Deductions are gifts from the Internal Revenue Service (IRS) to taxpayers, and "above-the-line" deductions are the best of them. All deductions subtract from your taxable income so you pay taxes on less, but these are especially beneficial—they reduce your adjusted gross income (AGI) and are available whether you itemize or take the standard deduction.

Here's what you need to know about these deductions.

What Are Above-the-Line Deductions?

Above-the-line deductions got their name because the deductions used to be made on the first page of the Form 1040 tax return, before the line that designates your AGI. These deductions subtract from your income to arrive at your AGI.

You could then subtract your standard deduction or the total of your itemized deductions from this number to reduce your taxable income even more. The math and the end result are still the same, but these deductions are no longer listed on "above the line" on Form 1040 because of changes made to tax return.

After the passage of the Tax Cuts and Jobs Act (TCJA), the IRS introduced a new 2018 Form 1040, and then it introduced more changes to the form in 2019. More changes followed with the 2020 return.

Form 1040 tax returns have been reduced to fewer lines. Numerous schedules have been introduced to include all the information that used to be entered on that first page. Above-the-line deductions have been moved to Schedule 1.

  • Alternate name: Adjustments to income

How Do Above-the-Line Deductions Work?

All of these deductions are listed in Part II of the 2020 Schedule 1, "Additional Income and Adjustments to Income." Enter the amount you're entitled to claim for each of them, then enter the total on line 22. Transfer line 22 to line 10a of your Form 1040 tax return. That's where all the pieces will be combined to land on your final AGI for the year. You must submit Schedule 1 to the IRS along with your return.

The lines noted here apply only to the 2020 Schedule 1 and Form 1040. They were different in previous years.

Why Your AGI Matters

Your AGI is a magic number, because it determines whether you qualify for several other tax breaks. You’re either prohibited from claiming other deductions if your AGI is too high, or you can’t claim as much as other taxpayers who have lower AGIs.

For example, in the 2020 tax year (the return you'll file in 2021), you can claim an itemized deduction for medical expenses that exceed 7.5% of your AGI. You can, therefore, only deduct medical expenses you paid in excess of $6,000 if your AGI is $80,000, because 7.5% of $80,000 works out to $6,000. For those with an AGI of $35,000, that threshold drops to $2,625.

Affordable Care Act subsidies for health insurance depend on your AGI, as well, as do several tax credits:

  • The Child Tax Credit
  • The American Opportunity Tax Credit
  • The Lifetime Learning Credit
  • The Child and Dependent Care Tax Credit
  • The Earned Income Tax Credit

The amount you can contribute annually to various tax-deferred retirement plans also depends on your AGI.

Types of Above-the-Line Deductions

Several above-the-line deductions can help you bring your AGI down if you qualify.

Above-the-Line Deductions for the Self-Employed

Three above-the-line deductions can help out if you’re self-employed.

You can claim one for half the self-employment tax you must pay because you work for yourself rather than an employer. The self-employment tax comprises the Medicare and Social Security taxes that you would ordinarily share with your employer, but you can claim an above-the-line deduction for the portion your employer would have paid.

Contributions to a self-employed retirement plan are an above-the-line adjustment to income.

You can claim the premiums you pay for health insurance and long-term care policies for yourself and your dependents without itemizing and being subject to that 7.5% rule, up to the amount of your business’s net income. 

You can’t claim the above-the-line deduction for health insurance if you’re married, your spouse works, and they're eligible for health insurance coverage through their employer and that policy would cover you, as well. The same goes if you also hold down a regular job and are eligible for insurance coverage through your employer. 

The Alimony Deduction

The adjustment to income for alimony you've paid expired under the TCJA for those who became divorced in 2019 or later, but the total you pay per tax year is still an above-the-line adjustment to income if your divorce was final before December 31, 2018. This can be a significant deduction and greatly reduce your AGI.

Child support you might pay isn't tax-deductible, so your divorce decree or alimony order should clearly indicate that the payments you’re making are indeed alimony or spousal support. 

The Penalty on Early Withdrawal of Savings 

Maybe you were feeling flush last year, so you invested in a certificate of deposit (CD), and then something happened to make you feel not-so-solvent after all. Maybe you cashed in the CD before it matured, only to be hit with a penalty for doing so. There’s an above-the-line deduction for these types of fees as well.

You should receive a 1099-INT, a 1099-DIV, or a 1099-OID form from the financial institution, telling you the total penalty that you can claim on Schedule 1.

Retirement Plan Contributions 

The money you contribute to an IRA is also deductible above-the-line, or at least some of it is. There are limits to how much you can invest, based on your AGI before you claim these amounts as adjustments to income. Some other rules also apply, such as whether you or your spouse have access to employer-provided retirement plans.

Contributions to 401(k), 403(b), and 457 plans are eligible for this deduction, as well—subject to phaseout rules that are dependent on your income. Roth accounts don’t qualify. 

Health Savings Account Deduction

You can invest money in a health savings account to pay for certain healthcare costs that aren’t covered by your health insurance plan, and these contributions are above-the-line adjustments to income as well.

The plan must be a high-deductible policy, and group policy coverage doesn’t qualify. Your contributions must be made with “after-tax” dollars—in other words, they weren’t deducted from your pay before taxes were withheld on the balance. If you were allowed to take deductions on "pre-tax" dollars, it would effectively give you two tax breaks on the same money.

Student Loan Interest Deduction

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.

AGI limits prior to claiming this deduction applies here, too, however. You can’t claim the student loan interest deduction if you’re a single taxpayer with an AGI of $85,000. You won’t be able to claim the entire $2,500 if your pre-student loan interest deduction AGI is $70,000 or more.

These limits increase to $170,000 and $140,000 for married taxpayers who file joint returns. You can’t claim this one at all if you’re married but file a separate return.

Educator Expenses Deduction

Teachers and some other school employees can claim an above-the-line deduction for up to $250 as reimbursement for money they spend out-of-pocket on classroom supplies. Costs associated with taking certain continuing education courses are deductible as well. This limit increases to $250 each ($500 total) if you're married to an educator and file a joint tax return.

Some rules apply, however. You must have worked at least 900 hours during the tax year, and being employed by a post-secondary school doesn’t count. 

Expired Deductions 

Two well-known above-the-line deductions disappeared as the TCJA took effect in 2018, but one has since come back.

You might have heard that you could previously claim job-related moving expenses as an adjustment to income, but not anymore. The TCJA eliminates this tax perk for anyone other than members of the Armed Forces. Even then, certain conditions must be met. This deduction might come back in the 2026 tax year—this is one of the many portions of the TCJA that expires at the end of 2025.

You can once again deduct tuition and other educational fees that you paid for yourself, your spouse, or your dependents, even though this tax provision expired on December 31, 2017. It was extended by additional legislation through tax year 2020, but barring further legislation it will expire in the 2021 tax year.

Key Takeaways

  • Above-the-line deductions, otherwise known as "adjustments to income," are deductions that reduce your annual adjusted gross income (AGI).
  • You can claim above-the-line deductions whether you choose to itemize your deductions or claim the standard deduction.
  • These deductions are important because your AGI determines your eligibility for many other tax credits and deductions.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.