Above the Line Deductions vs Below the Line Deductions
Deductions are your friend when it comes to filing taxes. Deductions are items or expenses that you can subtract from your income for the purpose of reducing the amount of tax owed on that income. Obviously, the more deductions you’re able to take the lower your tax bill will be.
I talked about Itemized Deductions and Standard Deductions in my last post, both of which are considered “below-the-line” deductions. However below-the-line deductions are not the only tax deductions that the IRS entitles us to. Other deductions such as IRA contributions and HSA allocations can be taken in addition to the Standard Deduction or Itemized Deductions. These types of deductions are referred to as “above-the-line” deductions. Also known as adjustments to income.
Above the line deductions
Whenever possible, it’s savvy to take advantage of “above the line” deductions because they give you a double deduction. The reason they’re referred to as above the line deductions is because they get subtracted from your income before your AGI (Line 11 on Form 1040) is determined. Above the line deductions provide an additional deduction because you’re still allowed to claim the Standard Deduction or Itemized Deductions on top of them. The two of these together can reduce your taxable income significantly.
Above the line deductions include:
Educator expenses (for teachers)
Certain business expenses (for reservists, performing artists and fee-based government officials)
Moving expenses for active-duty military
Health Savings Account (HAS) contributions
Traditional Individual Retirement Account (IRA) contributions
Self-employment taxes
Self-employment retirement contributions
Self-employment health insurance
Student loan interest
Where to report above the line deductions
Above the line deductions are reported on Schedule 1 of the 1040.”. All your qualified deductions are added together and carried over to Line 10 of Form 1040. The total amount of your deductions is then subtracted from your gross income.
Below the Line Deductions
Everyone doesn’t have above-the-line deductions, but all taxpayers are entitled to a below-the-line deduction. Below the line deductions are either the standard deduction or the total amount of your itemized deductions whichever one you chose. These deductions are listed on Line 12 of the 1040 and then they are subtracted from adjusted gross income on Line 11.
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Are you working in a good career, bringing home decent money, but can’t quite escape the paycheck to paycheck cycle?
Does year after year go by with you seeing little improvement in your financial situation?
How much better would life be if your finances were on auto-pilot?
How much better would life be if you had plenty savings in the bank, a nice retirement account and no consumer debt?
I help people break free from the financial rat race and create the financial situation they really desire to see. I do this by:
1) helping them identify the mindsets, habits, and choices that prevent them from getting ahead.
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About Me
The day I realized I did not have to remain stuck in the financial rat race, turned out to be one of the best days of my life. That realization triggered a mental shift and the decision to pursue financial freedom.
Like many people, I never gave any serious thought to becoming debt free or building multiple streams of income. My surroundings suggested that being in debt and not owning many assets was perfectly normal. However something inside kept telling me that as long as I remain in this cycle:
I can’t pass down any wealth to my son because I’m barely making it myself.
I can’t travel to all the cool places on my bucket list because I can’t afford it.
I can’t donate money to worthwhile causes because I have my own own bills to worry about
I won’t be able to let go of my nine-to-five job because I have too much debt to pay back.
I listened to my inner voice and decided to make a change. At the time, I owed around $175,000. I didn’t how I would pay it off, I only knew that I could no longer accept my entire paycheck being practically spent before I ever saw it. I knew that I was done telling myself things would get better “one day.” I knew that I was tired of ruling out certain lifestyles simply because I didn’t think I would ever have the means to live that way.
Today, I’m in complete control of my finances, enjoying a debt-free lifestyle, and successfully building generational wealth.
There is no better feeling than being free from financial stress.
It feels good not owing anyone and know my income is really MY income.
It feels good to use my own money to build wealth for the future.
Ironically, what started as a journey to take control of my finances evolved into me becoming a Certified Financial Planner (CFP) and published author. That journey also led to me doing something I love; helping people improve their lives by improving their finances. I’ve successfully used my knowledge/expertise to help hundreds of people reach their financial goals and I’m committed to helping hundreds more.
If you desire to take your finances to the next level, you can do it! Let me help you get where you want to be!
Cornelius Davis Jr. CFP, ChFC, EA