Definition and Example of 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 "above the line" on Form 1040 because of changes made to the tax return forms. After the passage of the Tax Cuts and Jobs Act (TCJA), the IRS introduced a new 2018 Form 1040. More changes followed with the 2019, 2020, and 2021 tax return forms.
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.
- Alternate name: Adjustments to income
How Do Above-the-Line Deductions Work?
All of these deductions are listed in Part I and II of the 2021 Schedule 1, "Additional Income" and "Adjustments to Income." Enter the amount you're entitled to claim for each deduction, then enter the total on line 26. Transfer line 26 to line 10 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 2021 Schedule 1 and Form 1040, the tax return you'll file in 2022. They were different in previous years, and they may differ in the future because the IRS revises tax forms from time to time to conform to changes in the law.
Why Your AGI Is Important
Your AGI determines whether you qualify for several other tax breaks. Some tax breaks phase out. They're gradually reduced and ultimately eliminated at higher income levels. A tax break might provide that a deduction of $50,000 may begin to phase out dollar for dollar when your AGI is at least $250,000. As a result, no deduction would be allowed if your AGI is $300,000 or higher.
A tax break may be allowed only if a certain expenditure threshold is met. For example, you can claim an itemized deduction for medical expenses that exceed 7.5% of your AGI in the 2021 tax year (the return you'll file in 2022). You could therefore only deduct medical expenses you paid in excess of $6,000 if your AGI was $80,000 because 7.5% of $80,000 works out to $6,000. That threshold drops to $2,625 for those with an AGI of $35,000.
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 bring down your AGI 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 is the Medicare and Social Security taxes that you would ordinarily share with your employer. 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
Generally, the alimony you've paid 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 charged 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 individual retirement account (IRA) is also deductible above the line, or at least some of it is. There are limits to the amount of your contribution that you can deduct. These limits are based on your AGI before you claim these amounts as adjustments to income. 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 phase out rules that are dependent on your income. Contributions to Roth accounts are not deductible.
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 apply here, too, however. The student loan interest deduction phases out between AGI of $70,000 and $85,000 for a single taxpayer in the 2021 and 2022 tax years. 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 $500 total ($250 each) 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.
- 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.
Frequently Asked Questions (FAQs)
What's the difference between above-the-line deductions and below-the-line deductions?
Think of your adjusted gross income as "the line." Above-the-line deductions are the ones you take before determining your AGI and are typically called adjustments to income. Below-the-line deductions are the ones you're eligible to take after determining your AGI and are known as itemized deductions.
Why do individual taxpayers benefit more from above-the-line deductions?
The more above-the-line deductions you can take, the lower you can bring your adjusted gross income. Your AGI is an important figure when calculating other tax breaks you can claim. If your AGI is too high, you either won't qualify for those tax breaks or you'll only be able to claim a partial amount.