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Above the line deductions are also known as "adjustments to income" and are shown on lines 23-36 of Form 1040.
In the United States tax law, an above-the-line deduction is a deduction that the Internal Revenue Service allows a taxpayer to subtract from his or her gross income in arriving at "adjusted gross income" for the taxable year. These deductions are set forth in Internal Revenue Code Section 62. A taxpayer's gross income minus his or her above-the-line deductions is equal to the adjusted gross income. Because these deductions are taken before adjusted gross income is calculated, they are designated "above-the-line." Thus, those deductions allowed in computing "taxable income" under section 63 of the IRC are "below the line deductions" (thus, adjusted gross income represents "the line"). Above-the-line deductions may be more valuable to high income taxpayers than below-the-line deductions.
Above-the-line deductions are generally more advantageous for a high income taxpayer than so-called below-the-line deductions. Below the line deductions are subtracted from a taxpayer's adjusted gross income. Above-the-line deductions may also be subject to income-sensitive phaseouts or limitations, e.g., MAGI limits on Tuition and Fees deduction on line 34. Certain below the line deductions are also phased out for high income taxpayers pursuant to Internal Revenue Code Section 68. Medical and dental expenses are below the line deductions pursuant to Internal Revenue Code Section 67. These expenses may only be deducted, however, to the extent they exceed 10% (7.5 % for 65 and over ) of a taxpayer's AGI. ( Accordingly, if a taxpayer had an adjusted gross income of $100,000 and medical expenses of $11,000, he or she would only be entitled to deduct the amount by which these expenses exceed 10% of $100,000, or $10,000. Because these expenses exceed $10,000 by $1,000, the taxpayer is only entitled to a $1,000 deduction. Above-the-line deductions are also preferred because they can be taken by ALL taxpayers regardless of whether they take standard or itemized deductions (see attached tax ladder). Moreover, they are desirable because they reduce adjusted gross income (AGI). Generally, the smaller the AGI, the greater the percentage of deductibility of itemized deductions.
List of the above-the-line deductions
Internal Revenue Code Section 62(a)(1) allows above-the-line deductions for most ordinary and necessary business expenses which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee. I.R.C. 162(a). This includes reasonable allowance for salaries or other compensation for personal services rendered, traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
Internal Revenue Code Sections 62 states that the following items are allowable as above-the-line deductions:
- Contribution to Traditional IRA (Form 1040 Line 32)
- Certain expenses of performing artists (Form 1040 Line 24)
- Certain expenses of state officials (162) (Form 1040 Line 24)
- Certain expenses for books and supplies incurred by teachers (162) (Form 1040 Line 23)
- Certain expenses for Army Reserve members (Form 1040 Line 24)
- Certain deductions of life tenants and income beneficiaries of property
- Retirement plan savings for the self-employed (219) (Form 1040 Line28)
- Penalties forfeited because of premature withdrawal of funds (Form 1040 Line 30)
- Alimony payments (215) (Form 1040 Line 31a)
- Reforestation expenses
- Required repayments of supplemental unemployment compensation
- Jury duty pay given to the employer (Form 1040 Line 36)
- Clean fuel vehicles (for tax years 2003-2006)
- Moving expenses for members of the armed forces (217) (Form 1040 Line 26)
- Archer Medical Savings Accounts
- Interest on student loans (221) (Form 1040 Line 33)
- Higher Education expenses (222) (Form 1040 Line 34)
- Health savings accounts (223) (Form 1040 Line 25)
- Costs involving discrimination suits
- One-half of self-employment tax
See also IRS Publication 17.
- Adjusted gross income (AGI) = Gross Income IRC (61)(a) − Above the line Deductions (62)(a)
- Taxable income = AGI − Personal Exemptions (151) − Standard Deduction 63(c) or Itemized Deductions 63(d)