The Tax Cuts and Jobs Act passed at the end of 2017 will have a big impact on this year’s tax filing season — including some big changes to so-called “above the line” deductions that can lower your tax bill.
Most common tax deductions, such as those for charitable donations or mortgage interest, are only available to filers who itemize — and, generally, it’s only worth itemizing if you can write off more than the standard deduction. Because the new tax law nearly doubled the standard deduction — raising it to $12,000 for single filers and $24,000 for married couples filing jointly — nearly 30 million more taxpayers won’t find it beneficial to itemize this year. A married couple, for example, would need to have made more than $24,000 in mortgage interest payments, donations, and other deductible expenses to make itemizing them worthwhile.
That’s what makes above the line deductions — which don’t need to be itemized, and can be taken on top of the new, generous standard deduction — more important than ever. (They’re generally supported in the free versions of popular tax software, too.)
Like itemized or (“below the line”) deductions, above the line deductions reduce your taxable income and your overall tax bill. But you take them before calculating your adjusted gross income, which delivers some important benefits.
“Above the line are always the best types of deductions, and especially with the new tax law in place. The reason is that many tax benefit limitations are based on adjusted gross income, or AGI,” said CPA Tom Wheelwright, author of Tax-Free Wealth and CEO of WealthAbility.
Above the line deductions can directly lower your adjusted gross income right off the bat, and you don’t have to itemize to claim them. And your AGI determines some of the tax benefits you may be eligible for — including, for example, whether you can contribute to a Roth IRA in a given year. “So, the lower your AGI, the more tax benefits you receive, such as increased medical deductions, limited to amounts over 7.5% of AGI, or real estate deductions, which are limited if AGI is more than $100,000,” Wheelwright said.
The tax overhaul made some drastic changes to above the line deductions, however, scaling back some and eliminating others altogether.
To help you prepare for filing your 2018 taxes, here’s a look at some of the key surviving deductions in this category, as well as those that were eliminated.
Two Above the Line Deductions That Got the Ax for 2018
Moving Expenses (Except for Military)
The above the line deduction for moving expenses has been dramatically scaled back as part of the tax overhaul, said Daniel Marques, a CPA and partner at Pennsylvania-based Drucker & Scaccetti. It’s now only allowed for members of the U.S. military.
“In prior years, if you had to move for your job and met certain requirements, you could deduct the associated expenses,” explained Marques. “This applied to anyone irrespective of their type of work.”
Though it’s unclear why, this deduction has been suspended until Jan. 1, 2026, for everyone except for active duty members of the armed forces.
Tuition and Fees
In unfortunate news for students, the above the line deduction for tuition and fees hasn’t been extended for tax year 2018 — and with the government in a partial shutdown, it’s unclear whether it will be.
“Tuition and fees is no longer on the list,” said Marques. “This is a product of the deduction not being extended as of this writing. It’s on the list of ‘extenders,’ which are periodically extended by Congress — but no word on whether or not it will again be extended for 2018.”
The tuition and fees deduction made it possible to reduce the amount of your income that was subject to tax by up to $4,000. The concept with this deduction was that you could either deduct a certain amount of your higher education expenses or take a credit, explained Marques.
For most taxpayers, an analysis would typically be performed during the tax preparation process to determine whether the deduction or the credit would provide a greater tax benefit. The only option under current law however, is to take a credit, said Marques.
Above the Line Deductions Still Available for Tax Year 2018
The good news is, most above the line deductions survived tax reform, including the following breaks.
Traditional IRA Contributions
If neither you nor your spouse have access to a 401(k) or similar employer-sponsored retirement plan at work, then you can deduct any contributions you make to a traditional individual retirement account (IRA).
With a contribution limit of $5,500 for 2018 ($6,500 if you’re over 50), that’s a quick way to lower your tax bill and shore up your retirement savings at the same time. Even better, you can still make those contributions for tax year 2018 up until the April tax deadline.
Teachers, classroom aides, and other K-12 educators who worked more than 900 hours in 2018 are still able to deduct up to $250 in classroom supplies or other qualified school expenses without itemizing. However, they’ll no longer be able to itemize deductions above and beyond that cap as in years past.
Health Savings Account Deduction
Money that you squirrel away in a health savings account (HSA) delivers double tax bonuses, and the good news is that this above the line deduction survived tax reform. That means any after-tax money you put into an HSA can be deducted to lower your tax bill. (Pre-tax contributions withheld from your paycheck cannot be deducted, however.)
“You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on a Schedule A, Form 1040,” explained Marques.
The added tax bonus here? When you have eligible medical expenses, distributions can be withdrawn from the plan tax-free.
There are a number of above the line tax deductions designed to help the self-employed, and all of them are still in play after the tax overhaul.
If they don’t have access to an employer health plan (or a spouse’s), then self-employed taxpayers can write off health insurance expenses, up to their business’s net income. Sole proprietors can also deduct half of the hefty Social Security and Medicare taxes they must pay.
Retirement contributions to SEP plans, which are designed to put self-employed individuals on equal footing with those who are eligible for an employer-sponsored pre-tax retirement plan, such as a 401(k), can also be used to lower your adjusted gross income.
“This deduction will be a key tax planning item for self-employed individuals seeking to minimize their adjusted gross income,” said Marques. SEP contributions must be made to an individual retirement account (IRA) or annuity. According to the IRS, there’s a special formula to determine the amount you’re allowed to deduct for contributions made to SEP retirement plans.
“These accounts are easy to set up, and unlike a 401(k) they can be set up after Dec. 31, 2018, and prior to the tax due date, including extension,” added Chris Jackson, CEO and founder of California-based Lionshare Partners. “SEP IRAs can be set up at your local discount brokerage such as TD Ameritrade, Schwab, or Fidelity.”
Student Loan Interest Deduction
The student loan interest deduction also remains intact as an above the line deduction, but claiming this particular benefit is not exactly straightforward.
“Given the astounding amounts of student debt burdening those attending college, most taxpayers are happy to see a deduction for student loan interest,” said Marques. “However, once you dig into the details, many find they’re ineligible for the actual deduction.”
To begin with, the maximum deduction available is $2,500, said Marques. In addition to the cap, there are numerous requirements and hurdles to clear before you can take the deduction.
“To simplify: It almost always boils down to how much money does the taxpayer make,” continued Marques.
The thresholds for the deduction are based upon your filing status. If your filing status is married filing jointly, you can take a full deduction as long as your AGI does not exceed $130,000 — before factoring in the student loan deduction. Married couples whose joint AGI exceeds $160,000 do not qualify for the deduction at all.
If you fall somewhere in between those two income ranges, you can take a partial deduction, said Marques.
“If your filing status is anything other than married filing jointly, you’re allowed a full deduction if your AGI is less than $65,000, and you lose the entire deduction if your AGI exceeds $80,000. Not as beneficial or easy to take as it may seem on its face,” he said.
Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.