Tax Tip: Not All Deductions Are Created Equal

Editor's Note: This article is part of our 2013 Tax Tips series. Robert Flach is an expert with almost 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) — There are two types of tax deductions. “Above the line” deductions are claimed on Page 1 of Form 1040 and reduce Adjusted Gross Income. “Below the line” deductions are claimed on Page 2 of the 1040 and reduce Taxable Income. The “line” is your Adjusted Gross Income.

“Above the line” deductions are “more better” than “below the line” ones. Because these deductions reduce your AGI, they could also increase a multitude of other tax benefits that are “phased out” or disallowed altogether based on your AGI, or a “modified” AGI, and could also reduce the amount of taxable Social Security or Railroad Retirement benefits. An “above-the-line” deduction of $1,000 could actually reduce your net Taxable Income by more than $1,000.

“Above the line” deductions include expenses that are claimed on Schedules C, D, E and F, and “Adjustments to Income” such as:

  • Alimony
  • Early withdrawal penalties for CDs and savings accounts
  • Educator expenses
  • Job-related moving expenses
  • Qualified tuition and fees
  • Self-employed deductions for health insurance premiums, half of the Self-Employment Tax and traditional retirement plan contributions
  • Student loan Interest
  • Traditional IRA contributions

“Below the line” deductions are the Standard Deduction or Itemized Deductions from Schedule A and Personal Exemptions. The tax benefit of a deduction claimed “below the line” is always limited to the amount of the actual deduction. A $1,000 “below the line” deduction will reduce your net taxable Income by only $1,000.

Here is a tip: You can deduct as a miscellaneous itemized deduction the cost of preparing your tax returns. If the invoice is itemized you can allocate the tax preparation fee to Schedules A, C, E and F as per the itemization.

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