Above The Line Deduction

What Is Above The Line Deduction?

Above-the-line deductions are structural changes to income that a person can make if they are qualified, regardless of whether they itemize or take the standard deduction.

Deeper Definition

Above-the-line deductions are permitted from an individual’s total income to arrive at the adjusted gross income of a tax filing and lower the tax due by the individual. In this type of deduction, an item is deducted from the net income in a bid to calculate the adjusted net gain on the IRS form 1040, a form issued by individual taxpayers and households in the United States and record their annual taxes.

Net income is computed by summing up an individual or household’s source(s) of income throughout a year as documented on W-2s, profit, investment income, unemployment income, retirement account payments, Social Security income, or any other forms of monetary gain or compensation.

Then, all above-the-line deductions are totaled and removed from net income to arrive at adjusted gross income. Itemized or standard deductions are subtracted from adjusted gross income to get at the taxable income amount. The amount of tax a person or a family pays annually depends on the final taxable income, not the gross gain or adjusted gross income.

One strategy to lower the amount of income tax you have to pay is to take advantage of above-the-line deductions.

The tax code allows all types of taxpayers to take advantage of above-the-line deductions, which include the following: Educator expenses, Student loan expenses deduction, Health saving account contributions, self-employment deduction, individual retirement arrangement contributions, etc.

Above The Line Deduction Example

Let’s suppose Jane, a medical student at a university, took out a student loan. She is entitled to a $2,500 deduction for the interest she pays on loan. In order to compute the amount to be claimed, specific Adjusted Gross Income restrictions must be met. However, she can not be eligible for this deduction if her AGI before the loan interest deduction is $70,000. A single taxpayer with an AGI of $85,000 before the loan isn’t eligible as well.