Above the Line vs Below the Line Deductions Explained

Knowing the difference between above-the-line vs below-the-line deductions is important for individuals and business owners when tax season comes around. While both can potentially reduce your taxable income, there are some nuances that are essential to understand.

The good news is that tax planning professionals can save you precious time and money by explaining how all the possible deductions could work for you. This can ultimately improve your bottom line, leaving you with more funds to invest in your business.

What Is the Difference between Above-the-Line and Below-the-Line Deductions & Why Does It Matter?

Income tax deductions are divided into two categories: above-the-line deductions and below-the-line deductions. "The line" refers to your adjusted gross income (AGI). This is a figure that you calculate using the Internal Revenue Service (IRS) Form 1040. Your AGI is used as a base to calculate your taxable income.

The main difference between above-the-line and below-the-line deductions is that above-the-line deductions are used to calculate your AGI:

• An above-the-line deduction is any item you subtract from your gross income to arrive at your AGI. 

• Below-the-line deductions are deducted after you calculate your AGI to arrive at your taxable income.

Effectively, these two types of deductions have different functions and are applied at different stages in the process of calculating your taxable income. However, both deduction types help you reduce your taxable income.

Pro tip: The U.S. tax code is a labyrinth even for experts, and using it effectively to lower your tax bill can be tricky. Fortunately, tax planning experts understand the intricacies of the system and can help you avoid overpayment by applying any deductions for which you qualify. Professionals can also help you understand what counts as non-taxable income so you don't overpay or make mistakes on your tax return.

Common Above-the-Line Deductions

You can find above-the-line deductions on Schedule 1, Part II of Form 1040. Common above-the-line deductions include:

• The employer-equivalent portion of self-employment taxes

• Health savings account (HSA) contributions

• Health insurance premiums

• IRA contributions and contributions to qualified retirement plans like traditional 401(k), 403(b), and 457(b) accounts

• Student loan interest: If you pay more than $600 on student loan interest, you should fill out Form 1098-E. You may be able to deduct up to $2,500, or the full amount of interest you paid, whichever is lower. You must fulfill certain criteria for this deduction.

• Educator expenses

• Alimony payments

Below-the-Line Deductions: Standard Deduction Amount vs Itemized Deductions

Taxpayers have two main options for lowering their taxable income “below the line”: the standard deduction or itemized deductions. As the name suggests, the standard deduction is a blanket amount you can deduct from your AGI. This amount depends on your filing status for taxes. Note that the standard deduction amount will rise in 2024.

2023 and 2024 Standard Deduction Limits

Tax Filing Status	2023	2024
Single	13,850	14,600
Married Filing Separately	13,850	14,600
Head of Household	20,800	21,900
Married Filing Jointly	27,700	29,900
Qualifying Surviving Spouse	27,700	29,00

The other option is itemized deductions. This involves adding up all of your individual deductions. Most people choose the standard deduction because it's less work and often works out to be more than itemized deductions. However, your accountant may advise you to opt for itemized deductions if it's the most financially beneficial option for you.

Other Common Below-the-Line Deductions

If you itemize your below-the-line deductions, the following are some of the most common deductions to take:

• Property taxes: You can deduct up to $10,000 of eligible state and local income taxes.

• Mortgage interest: Write-offs are limited to interest on up to $750,000—half that for married-filing-separately taxpayers—if your mortgage debt started after December 15, 2017. This rises to interest on the first $1 million of property value if you got your mortgage before this date.

• State taxes: The write-off is capped at $10,000 (see above) for any deductible state or local taxes. Please note that people living in Florida shouldn’t have many (if any) state taxes to deduct because Florida doesn’t tax individual income.

• Charitable contributions: You may be able to deduct cash contributions of up to 60% of your AGI.

• Medical expenses: You can deduct medical and dental expenses as an itemized deduction but only to the extent that these expenses exceed 7.5% of your AGI. You can also deduct the mileage for travel you made for dental or medical purposes.

Maximizing your deductions is one of the top tax planning strategies to know that could make a huge difference to your tax return and improve your bottom line.

Don't Let Any Tax Benefits Pass You By this Tax Year

It can be hard to know where to start when it's time to do your taxes. For many, getting the most out of their tax return demands time and effort they simply don't have.

That's why working with a tax planning professional is important for so many individuals and businesses. A tax planning professional can help you identify all eligible deductions to leave you (potentially) with more money in your pocket at the end of the day.