When choosing whether to itemize or take the standard deduction, taxpayers consider the deductions available to them and calculate how each will lower their taxable income. However, these “below-the-line” deductions, which decrease your adjusted gross income (AGI), are not the only deductions available. There are several “above-the-line” deductions as well, which decrease your gross income. These deductions, or income adjustments, are available even to taxpayers who choose not to itemize.
Income adjustments are called “above-the-line” because of their location on the IRS Form 1040. Instead of completing a Schedule A, which is for itemized deductions, you can list them right on the Form 1040, above the line that lists your AGI. Your AGI helps you to determine your tax liability, and your above-the-line deductions help to determine your AGI. Lowering AGI is beneficial to many taxpayers because the AGI is used to compute other tax decisions, such as qualifying for the Alternative Minimum Tax. Above-the-line deductions will always lower your tax liability, while below-the-line deductions will only lower it if they exceed the standard deduction.
Just like below-the-line deductions and tax credits, above-the-line deductions can vary each year. All deduction limits shown are for tax year 2014. A professional tax preparer can help you determine which you qualify for. Here are some common above-the-line deductions:
IRA contributions: Contributions to traditional IRAs (not Roth contributions) are deductible up to $5,500 (or $6,500 if you’re over 50), with phase-outs for higher income earners.
HSA contributions: These are deductible only if you purchase a qualified high-deductible health insurance policy and do not have access to group policy coverage.
Employee moving expenses: If you move for a job, you may be able to deduct the associated expenses, assuming you meet the requirements for distance moved and time spent working after the move.
Self-employment expenses: Self-employed taxpayers can claim several above-the-line deductions, including those for health insurance premiums, retirement plan contributions and 50 percent of self-employment taxes.
Alimony: Any non-child support, court-ordered payment to an ex-spouse may be eligible for an above-the-line deduction.
Student loan interest: You can deduct up to $2,500 in student loan interest payments, as long as your AGI (before subtracting this deduction) is less than $80,000 or ($160,000 for married filers).
Even if you think you don’t qualify for these common above-the-line deductions, it’s a good idea to make sure. Above-the-line deductions can be beneficial for many taxpayers, with the bonus of not having to itemize.
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