Unlocking Tax Savings with Deductions Beyond Itemizing
In the complex world of tax deductions, understanding the distinctions between above-the-line deductions, below-the-line deductions, and standard and itemized deductions is crucial for effective tax planning. Each category serves a distinct purpose within the tax code, impacting how taxable income is calculated and influencing the overall tax liability of individuals.
Above-the-line deductions, also known as "adjustments to income," are beneficial as they can be deducted whether a taxpayer chooses to itemize their deductions or uses the standard deduction. The above-the-line deductions are a group of deductions not included as an itemized deduction. In addition, above-the-line deductions reduce a taxpayer's gross income to produce the Adjusted Gross Income (AGI). A lowered AGI can be critical in determining your eligibility for additional tax credits and deductions, as many tax benefits are either limited or phased out based on AGI thresholds. Here is a more detailed explanation of many of the above-the-line deductions:
Foreign Earned Income Exclusion: The Foreign Earned Income Exclusion allows eligible U.S. citizens and resident aliens living and working abroad to exclude a specified amount of foreign earned income from their U.S. federal taxable income. For 2025, the exclusion limit is $130,000 plus a housing exclusion which are taken below-the-line.
Educator Expenses: This deduction allows eligible educators, including teachers, instructors, counselors, principals, and aides, to deduct up to $300 of unreimbursed expenses incurred for classroom supplies and professional development courses. This includes books, supplies, computer equipment, and other materials used in the classroom.
Health Savings Account (HSA) Contributions: Taxpayers who participate in a high-deductible health plan (HDHP) can contribute to an HSA, which allows for tax-free savings designated for medical expenses. Contributions can be made by the individual or their employer, and the deducted amount helps lower the taxpayer’s AGI.
Self-Employed Retirement Plan Contributions: Self-employed individuals can deduct contributions made to retirement plans such as SEP IRAs, SIMPLE IRAs, and qualified plans (like 401(k)s). These contributions reduce taxable income and help self-employed taxpayers save for retirement with potential tax-deferred growth. This deduction is for the retirement plan contributions made for the benefit of the self-employed individual and shouldn’t be confused with the contributions the self-employed individual makes as an employer toward a retirement plan for employees, which would be a business deduction.
Self-Employed Health Insurance Premiums: This deduction allows self-employed individuals to deduct health insurance premiums paid for themselves, their spouses, dependents, and any children under age 27, even if the child is not considered a dependent. The deduction is particularly beneficial as it provides relief from high healthcare costs while lowering taxable income.
Alimony Payments: For divorce agreements finalized before 2019, the payer can deduct alimony payments made to a former spouse. This deduction is intended to offer tax relief to the paying spouse by decreasing the taxable income. However, under the Tax Cuts and Jobs Act, this deduction is not applicable to divorces finalized after December 31, 2018.
Student Loan Interest: This deduction allows borrowers to deduct up to $2,500 of interest paid on qualified student loans used for higher education expenses. The deduction is phased out at higher income levels but provides substantial relief by reducing taxable income for those eligible.
IRA Contributions: Taxpayers who contribute to a traditional IRA are allowed a deduction of up to $7,000 ($8,000 if over age 50) per year provided they have earned income of at least as much as the amount contributed. The limit is periodically adjusted for inflation. Contributions to Roth IRAs are not deductible.
Military Moving Expenses: Military moving expenses refer to the costs associated with relocating service members due to a permanent change of station (PCS). These expenses can include transportation, lodging, and shipment of personal goods. For active-duty members of the Armed Forces, the unreimbursed costs incurred during a PCS move are deductible. Beginning in 2026 members of the Intelligence Community will also qualify for this deduction.
Early Withdrawal Penalty: Taxpayers who incur penalties for early withdrawal of savings, commonly from certificates of deposit (CDs) or similar savings instruments, can deduct these penalties. The deduction offsets the income generated from the withdrawal, reducing overall taxable income.
Contributions to Archer MSAs: A Medical Savings Account (MSA) is a tax-advantaged account designed to help individuals save for future medical expenses. These accounts, which were created almost 30 years ago, were intended for self-employed individuals and employees of small businesses. They have generally been supplanted by HSAs, which have less restrictive contribution and broader eligibility rules.
Jury Duty Pay Given to Employer: Jury duty pay is taxable, but when the employer continues an employee’s compensation when on jury duty, the employee generally will be required to turn over their jury duty pay to the employer. Without this deduction, the employee would be taxed twice on the jury duty compensation.
Below-the-line deduction is a term that has been slowly transformed by Congress. It used to predominantly refer to either the standard deduction or the itemized deduction. However, the term has taken on a new meaning as Congress has added deductions that reduce taxable income but not adjusted gross income and are available in addition to whether the taxpayer itemizes deductions or takes the standard deduction. The One Big Beautiful Bill act (OBBBA) has more doubled the number of deductions in this category. Here is a rundown of these deductions.
199A pass-through deduction: The Section 199A pass-through deduction for 2025 offers a tax benefit to non-C corporation business owners. It allows a deduction generally equal to 20% of qualified business income (QBI) from various pass-through business activities, such as sole proprietorships, partnerships, S-corporations, rentals, farms, REITs, and publicly traded partnerships. Recent updates under the OBBBA 2025 legislation make this deduction permanent starting in 2026 and introduce a minimum deduction of $400 for taxpayers with at least $1,000 of QBI from active trades or businesses in which they materially participate.
Disaster related deductions: Disaster-related deductions generally refer to casualty loss deductions that taxpayers can claim for damages or losses caused by federally declared disasters. These deductions are designed to help individuals and businesses alleviate financial burdens resulting from events like hurricanes, earthquakes, or floods. Disaster-related losses from federally declared disasters can be claimed as qualified disaster losses, which offer unique tax advantages. These losses can be deducted in addition to your standard or itemized deductions, without having to itemize other deductions on your tax return.
Senior Deduction: The OBBBA, has added a temporary senior deduction for years 2025 through 2028. This deduction is $6,000 for eligible single filers aged 65 and over and $12,000 for married couples filing jointly where both spouses are 65 or older. The deduction phases when AGI reaches $150,000 for married joint filers or $75,000 for others. It does not take the place of the additional standard deduction allowed to those age 65 and older.
Non-itemizer charitable deduction: The non-itemizer charitable deduction created by the One Big Beautiful Bill (OBBB) is available for tax years beginning in 2026. This deduction is permitted for substantiated cash only donations with a maximum deduction of $1,000 for single filers and $2,000 for married couples filing jointly. Donations to donor-advised funds and non-operating private foundations do not qualify for this deduction.
Car Loan Interest Deduction: The One Big Beautiful Bill Act (OBBBA) added a car loan interest deduction temporarily available for tax years 2025 through 2028. The vehicle must be new and for personal use. It must have a final assembly in the United States. The loan must be secured by the vehicle and originated after December 31, 2024. The maximum annual deduction is $10,000. The deduction begins to phase out for taxpayers with a Modified Adjusted Gross Income (MAGI) over $100,000 for single filers and $200,000 for joint filers.
Tips Deduction: The OBBBA tips deduction is temporary and available for the tax years 2025 through 2028. The deductible tips are limited to $25,000 annually per tax return. To be eligible, tips must have been received in an occupation that customarily and regularly received tips before December 31, 2024. The IRS is scheduled to publish a list of qualifying occupations. The deduction reduces federal income tax, but tips are still subject to Social Security and Medicare taxes (FICA). In addition, the deduction is reduced for higher-income earners, starting at a Modified Adjusted Gross Income (MAGI) of $150,000 for single filers and $300,000 for those married filing jointly.
Overtime Pay Deduction: Another provision in the OBBBA is an overtime pay deduction available for tax years 2025 through 2028. The maximum annual deduction is $12,500 for single filers and $25,000 for married couples filing jointly. Only the premium portion of overtime pay is deductible. For "time-and-a-half" pay, this is the "half" that exceeds your regular rate. To be eligible, the taxpayer must be a W-2 employee, and the overtime must be required by the Fair Labor Standards Act (FLSA). The deduction begins to phase out for taxpayers with a modified AGI over $150,000 for single filers or $300,000 for joint filers.
In conclusion, while itemizing deductions often garners much attention, it is essential to recognize that numerous deductions remain available even if you don't itemize. These can significantly impact your taxable income, offering opportunities for tax savings across various situations. Whether it's deductions for student loan interest, educator expenses, or certain retirement plan contributions, being informed about these avenues can make a substantial difference come tax season.
For taxpayers, the choice between taking the standard deduction or itemizing deductions is pivotal. The standard deduction for 2025, which was enhanced by the OBBBA, is set at $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Meanwhile, itemized deductions cover areas such as medical expenses, property taxes, mortgage interest, and charitable donations. Choosing the optimal path—whether sticking with the simplicity of the standard deduction or delving into the details with itemized deductions—depends on your specific financial picture. Whichever route you take, maximizing your allowable deductions ensures that you keep more of what you earn.
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