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All taxpayers have a choice: They can claim the standard deduction, or they can itemize deductions. But some expenses can be deducted even if you don’t itemize.
Officially, these breaks are identified as adjustments to your income. But they are popularly referred to as “above-the-line deductions” because they are subtracted on Page 1 of your Form 1040 or Form 1040A, just above the line for your adjusted gross income, or AGI.
Taking these deductions will reduce your AGI, which in most cases, directly cuts your overall tax bill. The less taxable income, the less you’ll owe the IRS.
A word of caution: A few above-the-line tax breaks do require you or your tax software to fill out another IRS form or worksheet.
Let’s review the current above-the-line deductions you can claim in the order in which they appear on a Form 1040.
Educator expenses. With the educators’ expenses deduction, teachers and other public and private school system employees can subtract up to $250 they spent on classroom supplies or professional development courses.
This tax break became a permanent part of the tax code in 2015. It also was enhanced. The $250 maximum deduction amount is now indexed for inflation.
- Certain business expenses. Unreimbursed business expenses are itemized as a miscellaneous deduction. But some taxpayers — namely military reservists, performing artists and fee-basis government officials — can claim work-related costs directly without worrying about meeting a percentage threshold. Either you or your software will need to fill out Form 2106 or 2106-EZ does have to be filled out to claim this deduction.
- Health savings account deduction. A health savings account, or HSA, is a medical coverage plan that works much like an individual retirement account. Eligible participants put money into an HSA where it grows tax-free and withdrawals can be made to pay medical, dental and vision-care costs not covered under an accompanying high-deductible health care policy.
- Moving expenses. If you relocated for job reasons, some of your expenses can be deducted above the line. Form 3903 will have to be filled out.
Self-employment tax. If you’re self-employed, you have to pay Social Security and Medicare taxes — the amount collected from you as an employee and you as an employer. But you get to deduct half of those payments directly.
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- Self-employed retirement plans. If you have a self-employment pension plan, such as a Keogh or a Simplified Employee Pension plan, or SEP IRA, any contribution amounts can be deducted without itemizing.
- Self-employed health insurance. As an entrepreneur, you now can deduct 100 percent of health insurance premiums you paid for yourself, your spouse and dependents. Don’t forget to count what you paid toward long-term care policies.
Penalty on early withdrawal of savings. The IRS gives you a break when someone else slaps your hand. If you cashed in a certificate of deposit and paid an early withdrawal penalty, you’ll find the amount on the 1099-INT or 1099-OID that the account manager sent you. The IRS lets you subtract that charge from your income.
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- Alimony paid. Divorced filers get a chance to recoup alimony payments above the line. Be sure to include the Social Security number of your ex-spouse, so the IRS can make sure he or she reports the payments as income or the deduction could be disallowed.
- IRA deduction. If you contribute to a traditional IRA, you might be able to deduct at least a portion of your contribution from your income. Precisely how much you can claim directly on Form 1040 depends not only on your contribution amount, but also on your adjusted gross income and whether you or your spouse participates in a company-sponsored retirement plan.
- Student loan interest. Up to $2,500 of the interest you paid on a qualified student loan can be subtracted directly from income. The loan can be for you, your spouse or a dependent. Note that there are income limits and married taxpayers who file separate returns cannot claim this adjustment.
- Tuition and fees. The higher-education tuition and fees adjustment could reduce your taxable income by as much as $4,000. You’ll need to complete Form 8917 to determine the amount of the tuition and fees deduction. This tax deduction has expired, but you can still apply it for the 2016 tax year.
Domestic production activities. This above-the-line deduction was created to encourage “made in the USA” manufacturing efforts. U.S.-based businesses that manufacture products domestically instead of sending the work overseas might be able to deduct up to 9 percent of the money earned or 50 percent of the wages paid in connection with the production effort, whichever is less. This tax break applies not only to such expected occupations as construction or farming, but also is available to certain creators of software, films or recordings.
Form 8903 helps to figure the exact credit that goes on line 35 of your Form 1040.
Some specialty adjustments
Although line 36 of your 1040 simply instructs you to total your entries on all the previous adjustment lines, it can be used for other deductions, many of which are limited to unusual tax situations such as reforestation amortization.
Line 36 is where you or your tax software should enter any pay you got for serving on a jury, but then turned over to your boss because you got your regular pay while at the courthouse.
Contributions to special medical savings accounts offered by some small businesses also are accounted for there. If you have an Archer Medical Savings Account, Form 8853 helps determine the amount to enter on this catchall line.
So take a moment to check out all these other possible above-the-line deductions. Details are in the Form 1040 instruction book.
A few also on 1040A
What if you don’t want to or need to use the long Form 1040? You still get a chance to reduce your income if you file Form 1040A instead.
Four of these above-the-line adjustments — educator expenses, IRA contributions, student loan interest and tuition and fees — also can be deducted on lines 16 through 19 of that slightly shorter tax return.