Why Can’t I Deduct That? The Story of a Line
Have you ever brought a pile of paper to your tax return preparer: receipts from taxes paid, health care expenses, work expenses, receipts from charity, etc., and been told, ‘We appreciate you bringing this information in, but it’s not going to lower your taxes.’ What gives? There are deductions for these things, right? So why can’t I deduct them on my taxes? It all has to do with something tax professionals call ‘above the line’ and ‘below the line’ deductions.
I’m going to define what these terms, ‘above the line’ and ‘below the line’, means, and then I’m going to break it down into bite-sized pieces.
A deduction is below the line if it’s an itemized deduction—this means it’s weighed against the standard deduction when you calculate your taxes. If the amount itemized is less than the standard deduction, you take the standard deduction, and the itemized amount doesn’t impact your final tax bill. A deduction that’s above the line (also called an adjustment) is subtracted before we subtract the standard deduction or the itemized deduction. In other words, if a deduction is above the line, we get to take it as a deduction in addition to the itemized or standard deduction. For tax planning purposes, above the line deductions are much better because we get to take them no matter what! Where is this famous line on the tax form? It’s not a solid line unfortunately, ‘above the line’ deductions are recorded on line 10c and ‘below the line’ deductions are recorded on line 12 of the form 1040.
Now let’s break all that down:
Taxpayers get what’s called a standard deduction. The standard deduction is a fixed amount that is subtracted from your income before your tax bill is calculated. That amount for a single person for your 2020 taxes (filed in 2021) is $12,400 (an increase of $200 from last tax year) (see footnote 1). Let’s say you earned $20,000 in 2020, then you would only owe taxes on $7,600 of income ($20,000-$12,400). Very important note: your tax bill would not $7,600. Assuming no other deductions or credits, your tax bill will be around $760 (income under $9,875 is taxed at 10%). If you’d like more detail about how taxes are calculator, here is an excellent 2 minute video from Vox: https://www.youtube.com/watch?v=VJhsjUPDulw.
Does every American who files taxes deduct exactly $12,400? Unfortunately not. How much you deduct depends on a few things--whether you’re married or not, whether you have children or not, how old you are, and whether you have a visual impairment. All these inputs determine your filing status (to be described in a future blog post). But some people get to deduct even more on their taxes through a process known as itemizing.
Itemizing means that you choose to take lots of little (or sometimes big) deductions instead of taking the standard deduction. There are four big categories:
Medical and dental expense not covered by insurance (and not reimbursed)
State and local taxes you paid (including state and local income tax and property tax)
Interest paid on a home mortgage
Gifts to charity (See footnote 2)
When you file your taxes, the person who files your taxes or the tax software does an automatic calculation to find out which lowers your taxes more: the standard deduction, or itemizing deduction. You get to choose whichever lowers your taxes more.
So let’s say you paid $10,000 for dental work, but didn’t pay any state or local taxes, didn’t have a mortgage, and didn’t give to charity. Since the cost of your dental work ($10,000) is less than your standard deduction ($12,400), you get to claim the standard deduction instead of itemizing. So, the dental expense did not lower your overall taxes. If however you spent $15,000 on dental work (ignoring the 7.5% of AGI rule) (see footnote 3), you would be able to take a deduction of $15,000, an increase of $2,600 over your standard deduction. An additional deduction of $2,600 is very nice, but it might not be as much as you were hoping for given your medical expenses. That’s understandable! Hopefully, the previous example illustrates why your deduction may not be as big as you might have hoped.
Above the line deductions are deductions you get to take regardless of whether or not you itemize or claim the standard deduction. In other words, above the line deductions (also sometimes called adjustments), are bonuses on top of your standard deduction or itemized deduction! Here are some common examples of above the line deductions:
Expenses teachers pay out of pocket for their classes
Contributions to retirement plans (not including Roth IRAs or Roth 401(k)s)
Contributions to Health Savings Accounts (HSAs)
Student loan interest
Note these deductions typically have limits.
Where can this mythical line be found on the form 1040 (the tax form most people use to file their taxes)? Unfortunately, it doesn’t exist. Deductions that are ‘above the line’ are added together on line 10c and deductions that are below the line (or the standard deduction) are recorded on line 12. In between those two lines is our so-called “line”.
I hope this helps to define what ‘above the line’ and ‘below the line’ mean. If you have further questions, feel free to drop me a note on the Contact Us page.
1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020#:~:text=For%20single%20taxpayers%20and%20married,tax%20year%202020%2C%20up%20%24300. Dec. 19, 2020.
2. A big change this year (2020) is that everyone gets to deduct $300 on their taxes regardless of whether they itemize or claim the standard deduction. See a future blog post on this topic.
3. There’s something called the 7.5% of AGI limitation on medical expenses. This means you multiply your income (AGI) by 0.075, and subtract that amount from your total medical bill before including it in the itemizing calculation. For this example, I’m ignoring this fact.
