Below-the-line deductions, also referred to as itemized deductions, are specific expenses that taxpayers can use to reduce their taxable income when filing their taxes. Unlike above-the-line deductions, which are subtracted directly from gross income to calculate adjusted gross income (AGI), below-the-line deductions are subtracted after the AGI has been determined.
Types of Below-the-Line Deductions
Below-the-line deductions include a variety of allowable expenses, such as:
- Mortgage Interest: Interest paid on a mortgage for a primary residence or, in some cases, a second home.
- State and Local Taxes: Including state income taxes, local property taxes, and state sales taxes, subject to certain limitations.
- Medical and Dental Expenses: Expenses that exceed a specific percentage of the taxpayer’s AGI.
- Charitable Contributions: Donations made to qualified charitable organizations.
- Casualty and Theft Losses: Losses due to theft, earthquakes, floods, and other disasters.
- Unreimbursed Employee Expenses: Work-related expenses not reimbursed by the employer (subject to certain restrictions).
Special Considerations for Itemized Deductions
- Standard Deduction vs. Itemized Deductions: Taxpayers must choose between taking the standard deduction or itemizing their deductions, whichever results in a lower taxable income.
- Limitations and AGI Thresholds: Some itemized deductions are limited based on a percentage of the taxpayer’s AGI.
- Repeal of Certain Itemized Deductions: The Tax Cuts and Jobs Act of 2017 significantly changed the landscape for itemized deductions, eliminating or restricting certain deductions until 2025.
Examples of Below-the-Line Deductions
Case Example: Mortgage Interest Deduction
John and Mary have a combined AGI of $150,000. They paid $10,000 in mortgage interest on their primary residence. After calculating their AGI, they subtract the $10,000 mortgage interest as a below-the-line deduction from their taxable income.
Case Example: Charitable Contributions
Samantha donates $3,000 to various qualified charitable organizations. With an AGI of $80,000, she itemizes her deductions and includes the $3,000 contribution to reduce her taxable income.
Historical Context
The modern tax system, including the concept of itemized deductions, evolved significantly during the 20th century. The comprehensive tax reforms of the early 1980s under the Reagan administration and the more recent Tax Cuts and Jobs Act of 2017 have shaped the current rules and limitations surrounding below-the-line deductions.
Applicability
Itemized deductions apply to individual taxpayers who find that their total eligible expenses exceed the standard deduction. They are particularly beneficial to homeowners, charitable donors, and taxpayers with significant medical expenses.
Comparisons
- Above-the-Line Deductions: Reduce the taxpayer’s AGI and thereby lower the amount of income that is subject to taxation. Examples include contributions to retirement accounts and tuition deductions.
- Standard Deduction: A fixed dollar amount that reduces the income on which you are taxed, which varies based on your filing status, age, and other factors.
Related Terms
- Adjusted Gross Income (AGI): An individual’s total gross income minus specific deductions.
- Taxable Income: The amount of income used to calculate the amount of tax owed, after personal exemptions and deductions.
- Tax Credit: A direct reduction in the amount of tax owed, unlike deductions, which reduce taxable income.
FAQs
What is the difference between above-the-line and below-the-line deductions?
Should everyone itemize their deductions?
How has the Tax Cuts and Jobs Act of 2017 impacted itemized deductions?
References
- Internal Revenue Service (IRS) - Publication 17
- Tax Foundation - The Tax Cuts and Jobs Act: Key Provisions
- Congressional Research Service - Itemized Deduction
- Deloitte - Tax Cuts and Jobs Act Summary
Summary
Below-the-line deductions, or itemized deductions, are essential tools that taxpayers can use to potentially reduce their taxable income, provided these deductions exceed the standard deduction. Understanding the types, limitations, and regulations associated with these deductions can help individuals make more informed decisions when it comes to tax planning and filing.
