Above-the-line Deduction - Impact

Impact

Above-the-line deductions are generally more advantageous for a taxpayer than so-called below-the-line deductions. Below the line deductions are subtracted from a taxpayer's adjusted gross income. Above-the-line deductions are not subject to income-sensitive phaseouts or limitations. Certain below the line deductions, by contrast, are phased out for wealthy taxpayers pursuant to Internal Revenue Code Section 68. Additionally, certain below the line deductions may be taken only if they exceed a certain percentage of adjusted gross income. For example, medical and dental expenses are below the line deductions pursuant to Internal Revenue Code Section 67. These expenses may only be deducted, however, to the extent they exceed 7.5% of a taxpayer's adjusted gross income. See, Internal Revenue Code Section 213. Accordingly, if a taxpayer had an adjusted gross income of $100,000 and medical expenses of $8,000, he or she would only be entitled to deduct the amount by which these expenses exceed 7.5% of $100,000, or $7,500. Because these expenses exceed $7,500 by only $500, the taxpayer is only entitled to a $500 deduction. Above-the-line deductions are also preferred because they can be taken by ALL taxpayers regardless of whether they take standard or itemized deductions (see attached tax ladder). Moreover, they are desirable because they reduce adjusted gross income (AGI). Generally, the smaller the AGI, the greater the percentage of deductibility of itemized deductions.