Editor’s Note: This article is part of our 2012 Tax Tips series. Robert Flach is an expert with almost 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.
NEW YORK (MainStreet) – In a recent “Tax Tip” column, I told you that the extended deductions for educator expenses and students’ tuition and fees are claimed “above the line” – but what exactly does that mean?
Well, the “line” is your adjusted gross income, and in addition to above-the-line deductions there are also those that are claimed below the line.
Above-the-line deductions reduce your adjusted gross income and could therefore increase a multitude of other tax benefits that are “phased-out” or disallowed based on adjusted gross income or a “modified” adjusted gross income, and could also reduce the amount of taxable Social Security or railroad retirement benefits. An above-the-line deduction of $1,000 could actually reduce your net taxable income by much more than $1,000.
Deductions claimed below the line, on the other hand, reduce your taxable income only. These include the standard deduction and itemized deductions from Schedule A, and the tax benefit of a deduction claimed below the line is always limited to the amount of the actual deduction. A $1,000 below-the-line deduction will only reduce your net taxable income by $1,000.
Other above-the-line deductions, aka “adjustments to income,” include the following:
- Early withdrawal penalties for CDs and savings accounts
- Job-related moving expenses
- Self-employed deductions for health insurance premiums, half of the self-employment tax, and traditional retirement plan contributions.
- Student loan interest
- Traditional IRA contributions
You should keep in mind that you don’t have to itemize to claim these deductions.