Above-the-Line vs. Below-the-Line Deductions: Why It Matters More Than You Think
Above-the-Line vs. Below-the-Line Deductions: Why It Matters More Than You Think
A commonly misunderstood concept in tax planning is the difference between above-the-line deductions and below-the-line deductions. I know, the word “deduction” might have you drifting off to sleep already, but the tax code is important. After all, every dollar you can legally avoid giving to the IRS is a dollar that stays in your pocket. On a large scale and over a large period of time, this could add up to hundreds of thousands of dollars.
What Are “Above-the-Line” Deductions?
In this case, the “line” is your Adjusted Gross Income (AGI). Above-the-line deductions are officially called adjustments to income. They reduce your Adjusted Gross Income (AGI), which is one of the most important numbers on your tax return.
These deductions are taken before you arrive at AGI—hence the phrase above the line.
Some common examples include:
Traditional IRA contributions (if eligible)
Health Savings Account (HSA) contributions
Student loan interest (subject to income limits)
Self-employed health insurance premiums
Self-employed retirement contributions (SEP IRA, Solo 401(k), etc.)
Educator expenses
Certain business expenses for self-employed individuals
The key advantage: you don’t need to itemize to claim these deductions. Everyone who qualifies can use them. In other words, you take these deductions first, then arrive at your AGI, and then choose to either itemize more deductions or take the standard deduction.
What Are “Below-the-Line” Deductions?
Below-the-line deductions are what most people think of when they hear “tax deductions.” These come after AGI and typically involve either:
Taking the standard deduction, or
Choosing to itemize deductions
Common itemized deductions include:
Mortgage interest
State and local taxes (subject to caps)
Charitable contributions
Certain medical expenses (above a percentage of AGI)
Casualty and theft losses (in limited cases)
These deductions only help you if they exceed the standard deduction. If they don’t, then you would just take the standard deduction (unless you like giving extra money to the IRS). Itemizing is less common that it once was, due to how large the standard deduction is now: $16,100 for single filers, $32,200 for joint filers. *
Why Above-the-Line Deductions Are More Valuable
Here’s where things get interesting. Above-the-line deductions are more powerful because they reduce your AGI, and AGI is used to determine eligibility for many other tax benefits.
Lower AGI can impact:
Whether you qualify for Roth IRA contributions
Whether you can deduct traditional IRA contributions
Medicare premium surcharges (IRMAA)
Net Investment Income Tax (NIIT)
Student loan interest deductibility
Child tax credits and education credits
Medical expense deduction thresholds
In other words, above-the-line deductions don’t just reduce your taxable income—they can unlock other tax benefits you might otherwise lose.
Below-the-line deductions only reduce taxable income, not AGI. That’s still helpful, but it doesn’t create the same ripple effect.
A Simple Example:
Let’s say two people, Jason and Nikki, each earn $150,000.
Jason contributes $20,000 to a Solo 401(k).
Nikki donates $20,000 to charity.
Both can get a $20,000 deduction—but Jason’s is above the line, while Nikki’s is below.
Since Jason’s $20,000 contribution reduces his AGI, it could:
Help him qualify for other deductions or credits
Reduce Medicare surcharges down the line
Lower exposure to the Net Investment Income Tax
Nikki’s charitable donation only helps if she itemizes, and it does nothing to reduce her AGI.(Although, starting in 2026, she can take the standard deduction and still deduct a small amount of qualified charitable donations. *
Both strategies are valuable—but they are not equal. Of course, donating to a charity you care about has more advantages than just a tax deduction, but it still pays to understand how it will affect your taxes.
Strategies to Maximize Above-the-Line Deductions
Here are some of the most effective ways to leverage above-the-line deductions:
1. Use Tax-Advantaged Retirement Accounts Strategically
If you’re self-employed or a business owner, you have access to some of the most powerful above-the-line tools available:
Solo 401(k)
SEP IRA
Defined benefit or cash balance plans (for higher-income earners)
W-2 employees can often use:
Traditional IRA contributions (if eligible)
Employer retirement plans
These not only reduce taxes today but help you build long-term wealth.
2. Maximize Health Savings Accounts (HSAs)
HSAs are sometimes called the triple tax-advantaged account:
Contributions are deductible (above the line)
Any Growth is tax-free
Qualified medical withdrawals are tax-free
If you’re eligible for an HSA, this is often one of the most powerful tools available—especially for high-income earners who don’t qualify for other deductions.
3. Time Your Income and Deductions Carefully
Because AGI is so important, timing matters.
If you expect a high-income year:
Front-load deductible contributions when possible
Delay income if you have control (bonuses, self-employed income, etc.)
If you expect a low-income year:
Consider Roth conversions
Harvest capital gains strategically
Use lower tax brackets intentionally
Tax planning is not just about this year—it’s about managing your tax brackets across your lifetime.
The Biggest Mistake People Make
Most people focus only on deductions that are visible and familiar—mortgage interest, charitable giving, and property taxes.
But those are often the least efficient deductions.
High-income earners are frequently phase-limited or fully excluded from many below-the-line benefits. Meanwhile, they leave thousands of dollars on the table by not optimizing above-the-line strategies.
Tax Planning Is Not Tax Preparation
One of the most important distinctions to understand is this:
Tax preparation is about reporting what already happened.
Tax planning is about intentionally shaping what happens.
Above-the-line deductions require foresight. Once the year is over, many of these opportunities are gone.
That’s why proactive planning—especially for business owners, high-income professionals, and retirees—is critical.
Main Takeaways:
Understanding the difference between above-the-line and below-the-line deductions can dramatically change how you think about taxes.
Above-the-line deductions:
Reduce AGI
Unlock other tax benefits
Create long-term planning opportunities
Are usually more powerful
Below-the-line deductions:
Still matter
Require careful planning
Often need to be “bunched” or structured
The goal isn’t just to reduce taxes this year—it’s to avoid giving the IRS more than legally required over your lifetime. And yes, that may add up to hundreds of thousands of dollars.
For help with tax planning and overall financial planning, reach out to our office. You can call, text, or email me.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.
To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
