Claim Above-the-Line Deductions to Reduce Your Tax Bill
Deductions are the Internal Revenue Service’s gift 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. You can itemize your deductions, tallying up everything you spent on qualifying expenses during the tax year and subtracting the total, or you can claim the standard deduction for your filing status, but you can't do both.
Claiming the standard deduction is often more advantageous than itemizing because standard deductions more or less doubled under the terms of the Tax Cuts and Jobs Act (TCJA) in 2018. It would take a lot of itemized deductions to amount to more and make itemizing worth your time and trouble.
You can claim above-the-line deductions in addition to the standard deduction or itemized deductions, however.
Technically, these deductions are called “adjustments to income.” They're referred to as “above the line” because they used to be claimed on the first page of the Form 1040 tax return, before the line that designates your resulting adjusted gross income (AGI). They 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 actually "above the line" because of changes made to the 1040 in 2018 and 2019.
The 2018 and 2019 tax returns have been reduced to fewer lines. There are numerous schedules that many taxpayers will find they must file with their returns. These schedules cover all the information that used to be entered on the old 1040’s now-missing lines.
Above-the-line deductions are still accounted for and they’re still in effect. They just don’t appear on the first page of your 1040 anymore. They’ve been moved to “Schedule 1.”
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.
Here's an example: As of the 2019 tax year—the return you'll file in 2020—you can claim an itemized deduction for medical expenses that exceed 7.5% of your AGI. You could therefore only deduct medical expenses you paid in excess of $6,000 if your AGI is $80,000: $6,000 is 7.5% of $80,000. But that threshold drops to $2,625 if your AGI is $35,000.
Affordable Care Act subsidies for health insurance depend on your AGI, as do the Child Tax Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit, the Child and Dependent Care Tax Credit, and the Earned Income Tax Credit. The amount you can contribute annually to various tax-deferred retirement plans also depends on your AGI.
There are several above-the-line deductions you might qualify for to help bring your AGI down.
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 is 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 you’re eligible for insurance coverage through your employer.
The Alimony Deduction
The adjustment to income for alimony you've paid expired under the TCJA, but only for those who became divorced in 2019 or later. The total you pay per tax year is still an above-the-line adjustment to income if your divorce was final before Dec. 31, 2018. This can be a significant deduction and greatly reduce your AGI.
Before the TCJA, Congress took the position that your ex is benefiting from this money, and as such, they should be the one to pay taxes on it. You could therefore subtract that amount as an adjustment to income, and your ex would have to claim and pay the tax on this income instead. You must provide their Social Security number on Schedule 1. This ensures that the IRS can make sure they do.
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), then something happened to make you feel not-so-solvent after all. 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, 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, again subject to phaseout rules that are dependent on your AGI, but Roth accounts don’t qualify.
Health Savings Accounts
You can invest money into a health savings account to pay for certain healthcare costs that aren’t covered by your health insurance plan, and these contributions are also above-the-line adjustments to income.
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. That would effectively give you two tax breaks on the same money.
Student Loan Interest
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 your spouse to do so.
AGI limits prior to claiming this deduction apply 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.
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 increases to $250 each if you're married to an educator and you 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.
Some Expired Deductions
Some well-known above-the-line deductions disappeared in 2018, but one came back. You might have heard that you could 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 when the TCJA expires at the end of 2025, however.
You can once again deduct tuition and other educational fees you paid for yourself, your spouse, or your dependents. This tax provision expired on December 31, 2017, but then it was extended through 2020.
Filing Schedule 1
All these deductions are listed in Part II of the 2019 Schedule 1, "Additional Income and Adjustments to Income." Enter the amount you might be entitled to claim for each of them, then enter the total on line 22. Transfer line 22 to line 8a of your 1040 tax return. You must submit Schedule 1 to the IRS along with your return.
NOTE: Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
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.