Above-the-line deductions: the complete guide to claim them

Every year, the Internal Revenue Service (IRS) allows taxpayers to reduce their tax bills by claiming deductions. Deductions help lower your taxable income, enabling you to pay less in taxes. Above-the-line deductions are especially beneficial — they lower your adjusted gross income (AGI).

Your AGI is what the IRS uses to determine whether you can get other tax deductions. If your AGI Is high, either of these two can happen:

• you probably won’t write off as many deductions as the taxpayers with lower AGIs
• the IRS can prohibit you from writing off other deductions

That’s why claiming above-the-line deductions is crucial – it can help open doors for other more-valuable tax breaks.

Here’s everything you need to know about above-the-line deductions...

An above-the-line deduction is an amount that may be deducted from gross income on the first page of your tax return before you figure out your adjusted gross income (AGI). This means that above-the-line deductions can reduce your taxable income and ultimately reduce the amount of taxes owed.

Adjusted gross income is the amount of income you have left after specific deductions are subtracted. These include:

• Alimony paid
• Contributions to certain individual retirement accounts (IRAs) and other qualified retirement plans
• Self-employed health insurance premiums
• Student loan interest
• Half the self-employment taxes you pay
• Moving expenses for a job change
• Work-related education qualifying as a work-related expense
• Some educator expenses

Note: If you need help claiming all your tax deductions and maximizing your tax savings, try Bonsai Tax. Our app can scan your credit card/bank receipts to discover potential tax write-offs and save you thousands of dollars on your tax bill. Users typically save $5,600 from their tax bill. Try a 7-day free trial today.

What is the difference between above the line deductions and below the line deductions?

Above-the-line deductions are everything you can deduct before adjusted gross income, while below-the-line deductions are everything you can deduct after adjusted gross income.

For example, you can subtract your contributions to a traditional IRA, self-employed SEP or SIMPLE IRA, and health savings account from your gross income before you calculate adjusted gross income.

So, let's say your gross income is $35,000, your total contribution to a traditional IRA was $5,000 and you are using the standard deduction. Your adjusted gross income would be calculated as follows:

Gross income - contributions = Adjusted Gross Income

$35,000 - 5,000 = $30,000

After you figure out your AGI, you can claim below-the-line deductions. For example, if your adjusted gross income is $60,000 and you paid $2,500 in interest on a student loan or qualified mortgage interest, subtract this amount from $60,000. Your new taxable income would be $57,500.

Above-the-line deductions reduce your AGI on the front page of your tax return. Below-the-line deductions reduce your taxable income after AGI is calculated.

You can take an above-the-line deduction whether or not you itemize deductions on your tax return.

How above-the-line deductions affect your adjusted gross income (AGI)

What is adjusted gross income and why it matters

Adjusted gross income (AGI) is your total gross income minus specific deductions, including above-the-line deductions. It serves as the starting point for calculating your taxable income and influences eligibility for many tax credits and deductions. For freelancers and small business owners, understanding AGI is crucial because it directly impacts how much tax you owe and what tax benefits you qualify for.

For example, if you earn $70,000 in 2024 and claim $10,000 in above-the-line deductions, your AGI becomes $60,000. This lower AGI can help you qualify for credits like the Earned Income Tax Credit or deductions such as the student loan interest deduction, which have AGI limits. Therefore, managing your AGI through above-the-line deductions can reduce your overall tax burden.

To track your AGI effectively, use tax software like TurboTax or QuickBooks Self-Employed, which automatically calculate AGI as you input income and deductions. Regularly monitoring your AGI during the year helps you plan for tax payments and optimize deductions.

How above-the-line deductions directly reduce your AGI

Above-the-line deductions lower your AGI by subtracting specific expenses from your total income before other deductions and credits apply. These deductions include:

• Contributions to traditional IRAs
• Health savings account (HSA) contributions
• Self-employed health insurance premiums

Because they reduce AGI, they can have a bigger tax impact than below-the-line deductions, which only reduce taxable income after AGI is calculated.

For instance, a freelancer who contributes $6,500 to a traditional IRA in 2024 can deduct that amount above the line, directly reducing their AGI by $6,500. This reduction not only lowers taxable income but may also allow the freelancer to qualify for other tax benefits that phase out at higher AGI levels. Similarly, self-employed individuals can deduct 100% of health insurance premiums paid for themselves and their families, which also reduces AGI.

To maximize these deductions, keep detailed records of eligible expenses throughout the year and consult IRS Publication 535 for the latest rules. Using accounting tools like FreshBooks can help you categorize these expenses correctly, ensuring you claim all allowable above-the-line deductions.

Why managing your AGI with above-the-line deductions benefits freelancers and small business owners

Managing your AGI through above-the-line deductions offers strategic tax advantages, especially for freelancers and small business owners who often face fluctuating incomes. A lower AGI can increase your eligibility for tax credits, reduce the phase-out of deductions, and even affect your Medicare premiums or eligibility for Affordable Care Act subsidies.

For example, if your AGI exceeds certain thresholds ($73,000 for single filers or $116,000 for married filing jointly in 2024), you might lose access to valuable credits like the Child Tax Credit or education credits. By using above-the-line deductions to reduce your AGI below these limits, you can preserve these benefits and lower your tax bill.

To take action, review your income and expenses quarterly to identify potential above-the-line deductions. Planning contributions to retirement accounts or HSAs before year-end can strategically lower your AGI. Additionally, consulting a tax professional or using HelloBonsai’s tax planning tools can help you implement these strategies effectively.

Advantages of above-the-line tax deductions

You can claim above-the-line deductions without itemizing

Above-the-line deductions can be claimed regardless of whether you itemize your deductions or take the standard deduction. This means freelancers and small business owners can reduce their taxable income even if they don’t have enough expenses to itemize on Schedule A. For example, you can deduct contributions to a traditional IRA or student loan interest directly on Form 1040.

This flexibility is especially helpful in 2024, as the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. Many taxpayers find it more beneficial to take the standard deduction, but above-the-line deductions still lower your adjusted gross income (AGI) before applying the standard deduction.

To take advantage of this, track eligible expenses such as health savings account (HSA) contributions or educator expenses throughout the year. Using tax software like TurboTax or TaxAct can help you identify and claim these deductions easily, maximizing your tax savings even if you don’t itemize.

Above-the-line deductions reduce your adjusted gross income (AGI)

Above-the-line deductions directly lower your AGI, which is a key figure on your tax return that affects many other tax benefits and credits. A lower AGI can increase your eligibility for deductions such as the child tax credit, earned income tax credit, and education credits.

For freelancers, reducing AGI through deductions like self-employed health insurance premiums or the qualified business income deduction can have a significant impact. For instance, if your AGI drops below certain thresholds, you may qualify for additional tax breaks or avoid phase-outs that limit your deductions.

To optimize your tax situation, regularly review your income and deductions during the year. Tools like QuickBooks Self-Employed or Bonsai’s tax calculator can help estimate your AGI and highlight opportunities to increase above-the-line deductions before filing.

Above-the-line deductions simplify tax planning and filing

Above-the-line deductions simplify tax planning by reducing taxable income early in the process, which can make filing easier and more predictable. Since these deductions are taken before calculating AGI, they streamline your tax return and reduce the need for complex itemization.

For example, business owners can deduct half of their self-employment tax or contributions to retirement plans like SEP IRAs directly above the line. This reduces taxable income and makes it easier to estimate quarterly tax payments accurately, avoiding surprises at tax time.

To take full advantage, maintain organized records of deductible expenses throughout the year and consult updated IRS guidelines or a tax professional. This approach helps you stay compliant and maximize deductions while minimizing the time and effort spent on tax filing.

Above the line deductions list

Here's a comprehensive list of above-the-line deductions you can claim to lower your tax bill:

Educator expenses

Teachers – both in the public and private sector – can deduct up to $250 for educator expenses. And married couples who are both teachers can write off a maximum of $500.

The following are eligible for this deduction:

• Instructors
• Counselors
• Aides working at least 900 hours during school years
• Kindergarten teachers

Expenses include the purchase of:

• Books
• Supplies
• Equipment (computer, software, paper, etc.)
• Other property used in the classroom
• Computer equipment (hardware and software)
• Supplementary materials used by students

Moving expenses

If you move due to a change in your job or business location, the costs of your move are deductible as an adjustment to income. You can deduct any reasonable cost of moving household goods and traveling from your old home to your new home.

But there’s a catch, though: you can only deduct moving expenses for a job if you meet the distance and time tests.

• Distance test: You must work at least 50 miles farther from your old home than your old job was from your old home. If you had no previous workplace, your new workplace must be at least 50 miles from your old home.
• Time test: After the move, you must work at your new job for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new workplace.

Also, you can't deduct moving expenses for a move back to your former home.

Alimony payments

Generally, alimony or separate maintenance payments made under a divorce or separation instrument may be deductible by the payer and must be included in income by the payee.

If you receive alimony, include the amount received in your income.

If you pay alimony, you can claim the amount of alimony paid as an above-the-line deduction against your income.

Health Savings Account (HSA) contributions

If you're enrolled in a high deductible health plan (HDHP), you can contribute to an HSA and reduce your taxable income by the amount contributed. For 2024, an individual with self-only HDHP coverage can contribute up to $4,150 to an HSA account. Those with family HDHP coverage can contribute up to $8,300.

Those aged 55 or older can make an additional catch-up contribution of $1,000 to their HSA, regardless of HDHP coverage type.

Your contribution remains in your account until you use it. You can withdraw the money at any time to pay or reimburse qualified medical expenses you incur. If you withdraw money from your HSA for any other reason, the amount you withdraw will be taxable and it may also be subject to a penalty.

Note: Avoid commonly missed tax deductions by using a software like Bonsai Tax. Our app will scan your bank and credit card receipts to discover all your potential tax write-offs. Users generally save $5,600 from their tax bill. Try a 7-day free trial today.

Student loan interest deduction

You can deduct the amount you pay in interest on student loans for yourself, your spouse, or your dependent. Your loan must have been taken out solely to pay qualified education expenses.

So, who is a dependent? Your dependent is either a qualifying child or a qualifying relative.

Qualifying expenses are the total costs of attending an eligible educational institution, including graduate school. These include tuition, books, fees, supplies, and equipment that were required for enrollment or attendance at the educational institution.

50% of self-employment taxes

When you're a full-time employee, both you and your employee pay FICA, which is the federal insurance contributions tax (FICA) -- Social Security and Medicare. The IRS automatically deducts Social Security and Medicare payments from your wage throughout the year.

But when you're self-employed, you're required to pay both halves of Social Security and Medicare taxes. Luckily, though, because you can't have half of your self-employment taxes deducted from your paychecks, the IRS allows you to claim a deduction equal to 50% of your Social Security and Medicare taxes. So if you incurred $5,000 in self-employment tax, the IRS will give you a $2,500 credit for this expense.

IRA Contributions

You can deduct the amount you contribute to your IRA, Roth IRA, SEP-IRA, SIMPLE IRA plan, or simplified employee pension (SEP) plan during the tax year 2024 if you meet certain conditions. For 2024, your maximum deductible contribution is $6,500 ($7,500 if you're age 50 or older).

Health insurance premiums

You can deduct 100% of health insurance premiums if you are self-employed or have a net profit from self-employment.

You can deduct health insurance premiums paid for yourself, your spouse, and your dependents even if you do not claim itemized deductions on Form 1040.