Everything You Need To Know About Above-the-Line Deductions

When calculating your adjusted gross income, these deductions will be subtracted from your total income. After calculating this figure, you might further lower the amount of your taxable income by deducting either your standard deduction or the sum of your itemized deductions. The calculations and the final result have not changed; however, because of changes made to the tax return forms, these deductions are no longer stated "above the line" on Form 1040. The arithmetic and the final result have not changed. The Internal Revenue Service (IRS) has released a new version of Form 1040 for the year 2018 after enacting the Tax Cuts and Jobs Act (TCJA). Additional modifications were included with the tax return forms for 2019, 2020, and 2021.

How Do You Calculate Your Above-The-Line Deductions?

These deductions may be found in the "Additional Income" and "Adjustments to Income" sections of Part I and II of the 2021 Schedule 1. Fill out the amount you can claim for each deduction, and then fill out line 26 with the total amount. Move the line number from line 26 to line 10 on your tax return form 1040. Along with your tax return, you must hand over to the IRS a completed Schedule 1. The lines mentioned here only pertain to the 2021 version of Schedule 1 and Form 1040 that you will submit for your taxes in 2022. They were different in prior years, and they may be changed in the years to come because the IRS revises tax forms periodically to adhere to changes in the law.

Why Your AGI Is Important

Your AGI determines your ability to take advantage of the number of additional tax benefits. There is a reduction in several tax incentives. They begin to be phased out at higher income levels before being steadily lowered over time. Other tax credits, including those provided by the Affordable Care Act for health insurance, are also contingent on your AGI.

• The Credit for Children's Taxes
• Credit for Americans Offering New Opportunities
• The Credit for Continued Education Over a Lifetime
• The Credit for Children and Dependent Care Expenses
• The Credit for Earned Income on Taxes
• Your adjusted gross income is also a factor in determining the maximum yearly contribution amount you may make to various tax-deferred retirement plans.

Different Kinds Of Deductions Taken Above The Line

If you meet the requirements, you may be able to reduce your adjusted gross income (AGI) by taking advantage of many deductions that are taken above the line.

Above-the-Line Deductions for the Self-Employed

You may be eligible for three deductions above the standard deduction if you are self-employed. Since you are your boss and not employed by anyone else, you are eligible to get a credit equal to half of the self-employment tax you must pay. If you are married, you and your spouse work for a company offering health insurance coverage. If your spouse is qualified for health insurance coverage via their employer, you are not eligible to claim the above-the-line deduction for health insurance.

The Tax Deduction for Alimony

If your divorce was finalized before December 31, 2018, then the alimony you have paid may often still be considered an adjustment to income made above the line. Because the child support you may be required to pay is not tax-deductible, the divorce decree or alimony order should make it very apparent that the payments you are making are alimony or spousal support.

The Penalty for Early Withdrawal of Savings

You may have purchased a certificate of deposit (CD) because you felt financially secure the previous year. However, something may have transpired after that, which has caused you to feel as if you are not in such a secure financial position. Perhaps you cashed in the certificate of deposit (CD) before it matured, in which case you were subject to a penalty for doing so. In addition, you may take a deduction for these expenses that are made above the line.

Retirement Plan Contributions

At least a portion of the money you put into an individual retirement account, generally known as an IRA, may be deducted from your taxable income above the line. There is a limit on the total amount of your donation that may be deducted from your taxes. These limitations are determined by your adjusted gross income (AGI) before you claim these amounts as deductions or credits against your income. Other criteria must be followed, such as determining if you or your spouse have access to your company's retirement plans.

Health Savings Account Deduction

You can make contributions to a health savings account that are treated as above-the-line adjustments to your income, which means that the money you put into the account may be used to pay for some medical expenses that aren't covered by your health insurance plan.