Above the line deduction denotes deductions that a taxpayer is allowed to subtract from his gross income, subject to actual expenses, in order to arrive at his adjusted gross income. Adjusted gross income is the line or the cut off point or threshold. In as much the aforesaid deductions are taken before computation of the adjusted gross income, they are termed above the line deduction.
In contrast, below the line deductions stand for itemized deductions or standard deductions deductible from the adjusted gross income along with personal exemptions, in order to reach the taxable income.
Above the line deductions are more beneficial to the taxpayer than below the line deductions. Unlike below the line deductions that can be availed of only if an item exceeds a specified percentage of the adjusted gross income, above the line deductions are not subject to such restrictions or fetters. For instance medical expenses are deductible below the line only to the extent these are in excess of 7.5% of the adjusted gross income.
Above the line deductions are more advantageous since these not only reduce the adjusted gross income but also the taxable income of the concerned taxpayer. Smaller the adjusted gross total income, higher is the deductibility of the itemized deductions below the line, since these can be availed of only to the extent such an item exceeds prescribed percentage of the adjusted gross income.
Items allowable as above the line deductions include the following:
Reimbursed employee expenses, losses from sale of property, expenses for producing rental or royalty income, reforestation expenses , interest on student loans, higher education expenses , health savings accounts , retirement plan savings for the self-employed, penalties suffered because of premature withdrawal of funds, alimony payments, required repayments of supplemental unemployment compensation, specified expenses of performing artists, certain expenses of state officials , certain expenses for books and supplies incurred by teachers , prescribed expenses for Army Reserve members and specified deductions of life tenants and income beneficiaries of property.
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