Tax Deductions

Tax deductions are simply dollar amounts that you subtract from your total income in order to determine your taxable income. The more deductions you have, the less you owe the taxman. But like most things tax-related, deductions can be confusing. One way to simplify things is to think of tax deductions as falling into two categories: above the line deductions and below the line deductions.

Above the Line Deductions

The term 'adjusted gross income' gets thrown around a lot. What does it mean, exactly? Your adjusted gross income, or AGI, is your gross (total) income minus your above the line deductions. (The 'line' in question comes from the IRS 1040 tax form. Back in 2017, for example, the deductions above line 37 were used to calculate your AGI. The current 1040 form isn't set up the same way, but the nickname remains.) Your AGI determines if you're eligible for other tax credits and deductions, so lowering it is beneficial. You can lower it by making less money, or by claiming more above the line tax deductions. As you can probably guess, the better of these two options is the latter.

The following tax deductions were considered 'above the line' for 2019:

Educator expenses
Certain business expenses of reservists, performing artists, and fee-basis government officials
Health savings account (HSA) deduction
Moving expenses for members of the Armed Forces
Deductible part of self-employment tax
Self-employed SEP, SIMPLE, and qualified plans
Self-employed health insurance deduction
Penalty on early withdrawal of savings
Alimony paid
IRA deduction
Student loan interest deduction
Tuition and fees

Do you currently have a high deductible health insurance plan (HDHP)? If so, you may be able to reduce your tax burden by contributing to a Health Savings Account (HSA). The 2024 annual contribution limit for an individual HSA is $4,150, while a family can contribute up to $8,300.

Does your employer offer you a 401k or 403b retirement account? Contributions to these accounts are also considered above the line tax deductions. (They fall under the term "qualified plans" in the list above.) The 2024 contribution limit for these types of accounts is $23,000.

Obviously, not all of the options on the list may apply to your situation. Consult a tax professional for further guidance!

Below the Line Deductions

Once your AGI is determined, you can further reduce your tax burden by claiming 'below the line' tax deductions. In 2019, these deductions include:

Medical and dental expenses
State and local taxes
Home mortgage interest and points
Investment interest
Gifts to charity
Casualty and theft losses
Gambling losses
Impairment-related work expenses of a disabled person

When people refer to "itemizing your tax deductions", they are referring to below the line deductions. Itemizing simply means taking the time to tally up all of the above deductions for yourself or your family. When your taxes are filed, you'll either itemize your deductions or simply take the standard deduction. In order to pay less in taxes, you'll want to go with the option that produces the higher deduction. For 2024, the standard deduction for an individual was $14,600 ($29,000 for married filing jointly or qualifying surviving spouse; $21,900 for head of household). So, if an individual itemizes her deductions from the above list and finds that number to be greater than $14,600, it would probably be beneficial for her to itemize her below the line tax deductions for that year.

As always, the list above isn't as simple as it might seem. If you have further questions, I would consult a tax professional.

Sources:

IRS form 1040: https://www.irs.gov/pub/irs-pdf/f1040.pdf

IRS Schedule 1: https://www.irs.gov/pub/irs-pdf/f1040s1.pdf

Instructions for IRS Schedule A: https://www.irs.gov/pub/irs-pdf/i1040sca.pdf

IRS Schedule A: https://www.irs.gov/pub/irs-pdf/f1040sa.pdf