â€œAbove-the-lineâ€ deductions is just a different term for deductions that are applied against your gross income, which is the aggregate total of all your income such as salary & wages, business income, interest, dividends, unemployment income, gains on the sale of your assets, distribution from your retirement etc.
Because of these, “Above-the-line” deductions are also called as adjustments to your gross income. As discussed in my article about tax deductions, the “line” Â is a section in the 1040 form that marks the separation between the Adjusted Gross Income (AGI) calculation and itemized/standard deductions sections.
It is important that you reduce your AGI to as low as possible (or to have more â€œAbove-the-lineâ€ deductions) because majority of the tax limitations are based on this AGI number.
You may not qualify for certain tax benefits if your AGI exceeds the IRS threshold level. You see, even if your gross salary is $150,000 but if your â€œabove-the-lineâ€ deductions are $30,000, your adjusted gross income will only be $120,000 and the IRS will base most of the tax limitations rules on your $120,000 adjusted income and not on the $150,000 gross salary.
How the AGI affects some of the credits an exemptions
Examples of the tax breaks that are affected:
- American Opportunity Credit – cannot claim if Â the modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if Married Filing Jointly)
- Lifetime Learning Credit – cannot claim if (MAGI) exceeds $60,000 ($120,000 if Married Filing Jointly).
- Saver’s Credit – cannot claim if AGI exceeds $55,500 if Married Filing Jointly, $41,625 if Head of Household and $27,750 if single, Married Filing Separately or Qualified widower.
- Tuition and Fees deductions – cannot claim if MAGI is more than $80,000 ($160,000 or more if Married Filing Jointly)
- Personal or Dependency Exemptions – phased out for higher income earners. Taxpayers can lose at most two-thirds of the personal exemptions when AGI exceeds the threshold. In 2009, the salary threshold for single is $289,300 ($372,700 for married filing jointly, $331,000 for head of household).
- Child tax credits – The credit is limited if MAGI is above a certain amount. For married filing jointly, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000.
- Roth IRA Contributions Limits – In 2009, eligibility begins phasing out for single filers with a MAGI above $105,000,Â and for married filing jointly above $166,000. Single filers with a MAGI above $120,000 and married filing jointly with a MAGI above $176,000 are no longer eligible for making a Roth IRA contributions.
- Traditional IRA Contributions Limits – The Traditional IRA phase out is used to determine whether or not you can deduct your contributions. The phase out deductions for single filers starts at $55,000 and ends at $65,000. For married filing jointly, phase out starts at $89,000 and ends at $109,000. For anything over $109,000, contributions are no longer deductible.
How the AGI affects some of the itemized deductions
The AGI also affects the threshold limitation on some of your itemized deduction. On schedule A (the form use to itemized deduction) youâ€™ll notice that there are certain items that has a â€œfloorâ€ amount, where only the amount exceeding a fixed percentage of the AGI can be deducted.
Examples of those expenses are:
- Healthcare expenses â€“ where you can only deduct the amount that is over the 7.5% of your AGI. For example, if your AGI is $100,000 and your qualified health expenses are $8,000, your â€œfloorâ€ amount is $7,500 (7.5% of $100,000). This means that the first $7,500 of your qualified health expenses will be excluded from your itemized deduction. Thus, you will only be able to deduct $500 of those expenses. If your AGI is lower, then the â€œfloorâ€ amount will be lower and you would be able to include more health expenses on your itemized schedule.
- Miscellaneous Expenses – can only deduct the amount that is over the 2% of your AGI
- Casualty losses â€“ has a floor of 10% of the AGI
What deductions do you need to keep an eye on
- Retirement (IRA, SEP)
- Alimony paid to others
- Interest paid on student loans
- Self-employed health insurance deduction
- Health savings account deduction
- Moving expenses
- Educator Expense
- Tuition and Fees Deduction
- Business losses
- One-half of self-employment taxes
Or you can read the top 10 above-the-line deductions you do not want to miss: