Not All Deductions are Created Equal

Nothing puts a damper on the New Year like emails notifying you that tax forms are available. It’s like the government is trying to sabotage the new financially fearless you.  The only motivating factor is that hope for a refund. You racked up all those tax deductions your friends and family told you about so the odds are in your favor. You will get your Caribbean getaway! But then you learn it’s not that simple –not all deductions are created equal.

Deductions fall “above-the-line” or “below-the-line” and that line is your adjusted gross income (AGI). Above -the-line deductions are subtracted from your income to arrive at your AGI. These deductions include but are not limited to contributions to self-employed retirement plans and IRAs, contributions to a Health Savings Account, moving expenses if you moved in connection to a job or business, alimony paid and student loan interest. The resulting adjusted gross income impacts the amount and type of below-the-line deductions you qualify for on your return.

Once you arrive at your AGI, you can either take a standard deduction which is a fixed amount based on your filing status or you can deduct your actual itemized deductions. The below-the-line itemized deductions include charitable donations, medical expenses greater than 10% of AGI, taxes, interest, casualty losses and other miscellaneous deductions. If your total itemized deductions are less than the standard deduction ($6,300 Single, $12,600 MFJ), you would likely use the higher standard deduction. Therefore, you would not receive any benefit from your below-the-line deductions.

The wise Ben Franklin once said that in this world nothing can be said to be certain, except death and taxes. (I know, it’s a very uplifting way to end this post). So take the time to understand your 1040 and keep in mind that above the line deductions will always lower your taxes, but below-the-line deductions may not.