Above the Line Deductions, Itemizing, and Standard Tax Deductions

If you missed my post last week on Understanding Tax Deductions then I’d recommend you start there.

I certainly realize that taxes can be confusing, and I give all of the credit in the world to people that file their taxes on their own (the old-school, hand-written way).

Tax Deductions are a headache

If you’ve yet to file your taxes and if all of this stuff confuses you, then I’d highly encourage you to use an online tax software such as TurboTax.

File online with TurboTax: #1 rated and #1 selling tax software!
I work in the financial industry and I’d like to think that I know quite a bit about taxes, but writing up these posts even gives me a headache! I couldn’t imagine what it would be like for somebody that doesn’t like numbers.

Tax Calculations

Adjusted Gross Income (AGI) = Gross Income – “Above the line Deductions”

Taxable Income = Adjusted Gross Income (AGI) – Personal Exemptions (claim the Standard Deduction or Itemize)

“Above The Line” Tax Deductions

Above the line deductions are deductions than you can claim EVEN if you only use the Standard Deduction as your personal exemption. This means you DO NOT have to itemize and can still lower your tax burden!

Technically, to come up with your Taxable income, “above the line” deductions are subtracted from your Gross Income, and then your personal exemptions are subtracted from that (Standard Deduction or via Itemization). As detailed in the Calculations above.

The common error I see is that people aren’t aware of these “Above the Line Deductions.” We just know that you either claim the Standard Deduction or you can Itemize.
What you need to know is that there are some deductions you can claim regardless if you can itemize or not!

What Are Some of the Common Above the Line Deductions?

  • Health Saving Account (HSA) contributions
  • Traditional IRA contributions
  • Educator Expenses – Both public and private school educators (teachers) can deduct up to $250 for expenses related to classroom supplies. It’s not a large deduction, but since you don’t have to itemize to claim the deduction then you might as well do it!
  • Alimony
  • Student Loan Interest – this is commonly thought of as an itemized deduction, but it is not. You can deduct up to $2,500 of student loan interest “above the line” (as long as you qualify).
  • Job-Related Moving Expenses
  • Self-Employed Retirement Plans – SEP IRA, SIMPLE, etc.
  • Self-Employed Health Insurance Premiums and (half of) Medicare and Social Security payments

While many of these may not apply to your situation, these do apply for a small percentage of Americans. If any of these apply to you then it’s wise that you take advantage of these deductions even if you cannot itemize!

Common Itemized Deductions

If you’re unsure whether or not you should itemize (or just confused by the concept), then please check out my last post on Understanding Taxes: Tax Deductions.

If you know that you have more deductions (write-offs) than what is given to you via the Standard Deduction ($5,800 for SINGLE and $11,600 for Married Filing Jointly), then it’s wise that you take the time and itemize on your tax return.

Itemizing simply is the process for tallying up all of your deductions and claiming them on your taxes. Again, as I mentioned in the Understanding Tax Deductions post, you cannot itemize if you do not have more to claim than the Standard Deduction allows.

*Important Note: most of these deductions will come with the appropriate tax form that you’ll need when filing your taxes. Each lender or organization is typically responsible for sending you the proper forms.

Common Itemized Deductions:

  • Mortgage Interest
  • Mortgage Insurance Premiums
  • Property tax on your residence and Personal Property Tax paid on vehicles or other motor vehicles
  • Charitable Contributions
  • Other Taxes – it’s common to be able to deduct state and local income taxes OR state and local sales taxes (whichever is higher)
  • Medical Expenses – the key here is that you can only deduct any amount that is greater than 7.5% of your Adjusted Gross Income (AGI). In reality it is difficult to hit that number and this is often a place of great confusion for people.Furthermore, you cannot deduct medical or dental premiums that were paid with PRE-TAX dollars. So if you pay for medical insurance out of pocket, or your employer’s plan is paid with AFTER-TAX dollars, then you’ll be able to include those premiums in this deduction (again, as long as it’s above 7.5% of your AGI).
  • Unreimbursed Employee Business Expenses – meals, travel, vehicle mileage, etc.
  • Daycare Expenses for Children – if you’re paying out of pocket (not using funds from a FSA or HSA account), then Daycare expenses are deductible
  • Capital Losses – if you lost money in the stock market with funds that were in a normal brokerage account (non-retirement accounts), then you can deduct a portion of those losses.

Child Tax Credit

While I’m not going to spend much time on other “credits,” the Child Tax Credit and American Opportunity Credit will be common tax-breaks that many Americans will receive.

A tax credit is different than a deduction in the fact that you get a dollar-for-dollar reduction in the amount of taxes you owe (so credits are better than deductions).

While there are some rules that apply to the Child Tax Credit, all you need to know for the basics is that if you don’t earn too much (or too little) and if your child isn’t too old (and you’re taking care of them), then you’ll receive a $1,000 tax credit for each qualified child.

If your income is too low to fully take advantage of the Child Tax Credit, then you may be eligible for the Additional Child Tax Credit.

American Opportunity Credit

The American Opportunity Credit is tax credit of up to $2500 for college students (and parents if they pay for the cost).

This credit applies to a student that paid for higher education tuition, fees, and course materials.

There are a few stipulations to be eligible for the credit:

  • Expenses must be for the first four years of post-secondary education
  • Annual income for single filer must be less than $80,000 (or $160,000 married filing jointly)
  • Cannot be convicted of a felony drug offense
  • For at least one academic period, student carries at least 1/2 of the normal full-time work load for the course of study the student is pursuing

As always, all of these deductions and credits may have other qualifications so it’s wise to seek a competent tax professional when filing your taxes.

There is no doubt that taxes are confusing, but finding somebody (or something – i.e. TurboTax or H&R Block online tax software) that you can trust and that is knowledgeable will help make filing taxes an easy process.

Picture by David Castillo Dominici.

About the Author

By , on Feb 27, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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  1. Kari says:

    This was the last year I was able to get credit for the student loans (because I finally paid them all off). Next year I’ll be able to deduct the mortgage interest. Will be interesting to see how it impacts my taxes. I thought for sure I’d break even this year, but thanks to a raise and some extra money from freelance writing, I owe again. Thinking about trying to do a home office deduction next year when I have a dedicated office space at home. I was going to try it this year, but I know it’s tricky and didn’t want to make any mistakes.

    • Andy says:

      The home office deduction is very tricky and you have to meet some pretty stringent guidelines. It’s worth a shot though!!

      Congrats on paying off the loans; I can’t wait until we’re there. I’m TIRED of being able to deduct that $2500 in interest. lol.

  2. Shilpan says:

    I read an amazing statistics that more than 50% homeowners choose standard deduction. That’s incredible as you buy home for itemize deductions.

    • Andy says:

      That is an amazing stat! The only explanation is that the mortgage is their only real deduction (property tax as well) and that amount doesn’t cover the standard deduction.

      It’s so amazing what marketing tricks/gimmicks that people fall for (buying a home so you can itemize deductions).

  3. CultOfMoney says:

    I’ve ended up itemizing each year since I bought my house. That mortgage interest deduction certainly helps, though the fact that the federal government decides to subsidize my mortgage is a bit appalling really. I’ve always tried to do my own taxes and I have the education and work experience needed if I ever decided to take the CPA exam. One of the reasons is this great quote attributed to John Maynard Keynes “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” Sometimes that certainly feels true. But the lobbyists sure agree.

  4. Andy says:

    LOL. …hopefully.

    I love to do the taxes myself as well, but I can’t admit that I browse the IRS website. I do find it annoying and there are WAY too many fules. I’m thankful for TurboTax and people that know how to do taxes…because I’m pretty sure I’d go crazy if I really had to do it all on my own.

  5. SB @ FPR says:

    I tried to itemize my tax a couple of time, each time the standard deduction came out more. This year I am gonna try again.

  6. AverageJoe says:

    I found out how the tax code worked by reading the 1040 from top to bottom. Although it wasn’t fun, it was easier than I’d imagined. It became much easier to identify opportunities to save on taxes and I learned about some of the logic in the tax code.

    (Did I just say “logic” and “tax code” in the same sentence? ….shudder…..)

    • Andy says:

      🙂 Pretty sure there isn’t any logic in the tax code.

      I’m not sure how I learned to do taxes. I think I just started walking through TurboTax a few years ago and slowly realized what was deductible and what wasn’t. You’re like Paul: willing to read through the IRS stuff to get the knowledge. That sounds about as enjoyable as watching a puddle evaporate.

  7. Turbo Tax is great for the more common tax items and issues but falls short when it comes to more complex things such as gains or losses from the sale of option contracts. A few years ago, I did rather well selling covered calls but had a terrible time figuring out how to treat it in Turbo Tax. Eventually, I just gave it my best shot. I think that is the best we can do until the tax code become a bit more simplistic.

    • Andy says:

      I agree with that. As I just mentioned on Paul’s comment: the system is simply way too complicated.

      With the new changes this year to the tax code (cost basis) I noticed that my Etrade statement came differently this year and it was much easier to enter on TurboTax. Because I agree…the last couple of years have been a little annoying. Did the new law/reporting help you at all?

  8. Tawni says:

    Thanks for breaking it down… great info!

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