Article Highlights:
1. 199A pass-through Deduction
2. Disaster Related Deductions
3. Senior Deduction
4. Car Loan Interest Deduction
5. Tips Deduction
6. Overtime Deduction
In the complex world of tax deductions, understanding the distinctions between above-the-line deductions, below-the-line deductions, standard and itemized deductions is critical for effective tax planning. Each category has a specific purpose under the tax code, influencing how taxable income is computed and an individual's overall tax responsibility.
Above-the-line deductions, also known as "adjustments to income," are favorable because they can be deducted regardless of whether a taxpayer decides to itemize or use the standard deduction. Above-the-line deductions are deductions that are not itemized. Above-the-line deductions reduce a taxpayer's gross income, resulting in Adjusted Gross Income (AGI). A lower AGI might be important in evaluating your eligibility for higher tax credits and deductions, as many tax breaks are limited or phased out based on AGI levels. Many of the above-the-line deductions are explained in greater detail below.1.Foreign Earned Income Exclusion: The Foreign Earned Income Exclusion allows eligible U.S. citizens and permanent aliens who live and work overseas to deduct a certain amount of foreign earned income from their federal taxable income. For 2025, the exclusion level is $130,000, plus a dwelling exclusion, which is calculated below the line.
2.Educator Expenses: Eligible educators, including teachers, instructors, counselors, principals, and aides, can deduct up to $300 in unreimbursed expenses for classroom supplies and professional development courses. This includes books, supplies, computers, and other classroom items.
3.Health Savings Account (HSA) Contributions: Taxpayers who have a high-deductible health plan (HDHP) can make contributions to an HSA, which allows them to save tax-free for medical expenses. Contributions can be made by the individual or their employer, and the amount deducted reduces the taxpayer's adjusted gross income.
4.Self-Employed Retirement Plan Contributions: Self-employed people can deduct contributions to retirement plans such as SEP IRAs, SIMPLE IRAs, and qualifying plans (401(k)s). These contributions minimize taxable income and assist self-employed persons in saving for retirement by providing tax-deferred growth opportunities. This deduction is for retirement plan contributions made for the benefit of the self-employed individual and should not be confused with payments made as an employer to an employee retirement plan, which would be considered a business deduction.
5.Self-Employed Health Insurance payments: This deduction allows self-employed people to deduct health insurance payments for themselves, their spouses, dependents, and any children under the age of 27, regardless of whether the kid is deemed a dependent. The deduction is especially advantageous since it provides relief from high healthcare bills while lowering taxable income.
6. Alimony Payments: For divorce arrangements executed prior to 2019, the payer may deduct alimony payments received to a former spouse. This deduction is meant to provide tax assistance to the paying spouse by lowering their taxable income. However, under the Tax Cuts and Jobs Act, this deduction does not apply to divorces finalized after December 31, 2018.
7.Student Loan Interest: Borrowers can deduct up to $2,500 in interest paid on qualifying student loans utilized for higher education purposes. The deduction is phased down for higher income levels, but it provides significant relief by lowering taxable income for individuals who qualify.8.IRA Contributions: Taxpayers who contribute to a traditional IRA can deduct up to $7,000 ($8,000 if over age 50) every year if their earned income is at least equal to the amount donated. The limit is routinely changed to reflect inflation. Contributions to Roth IRAs are not deductible.
9.Military Moving expenditures: Military moving expenditures are the costs of relocating service members owing to a permanent change of station (PCS). These costs may include transportation, hotel, and personal item shipment. Active-duty members of the Armed Forces can deduct unreimbursed expenses spent during a PCS move. Beginning in 2026, members of the Intelligence Community will also be eligible for this deduction.
10.Early Withdrawal Penalty: Taxpayers who incur penalties for early withdrawal of savings, typically from certificates of deposit (CDs) or similar savings instruments, may deduct these penalties. The deduction offsets the income generated by the withdrawal, lowering total taxable income.
11. Contributions to Archer MSAs: A Medical Savings Account (MSA) is a tax-advantaged account that allows individuals to save for future medical bills. These accounts, launched nearly 30 years ago, were designed for self-employed persons and small business employees. They have largely been replaced by HSAs, which have less stringent contribution limits and broader eligibility requirements.
12.Jury Duty Pay Given to Employer: Jury duty pay is taxable, however if an employer continues to pay an employee while they are on jury duty, the employee must normally turn over their jury duty pay to the company. Without this deduction, the employee would be taxed twice on their jury duty pay.
Congress has slowly altered the term "below-the-line deduction." It used to refer mostly to the standard deduction or the itemized deduction. However, the phrase has taken on a new meaning as Congress has added deductions that lower taxable income but not adjusted gross income, and they are accessible regardless of whether the person itemizes or takes the standard deduction. The One Big Beautiful Bill Act (OBBBA) has more than increased the amount of deductions in this category. Here's a breakdown of these deductions.
1.The Section 199A pass-through deduction for 2025 provides a tax benefit to non-C corporation business owners. It permits a deduction of up to 20% of qualified business income (QBI) for a variety of pass-through company activities, including sole proprietorships, partnerships, S-corporations, rents, farms, REITs, and publicly traded partnerships. Recent changes to the OBBBA 2025 legislation make this deduction permanent beginning in 2026 and establish a $400 minimum deduction for taxpayers with at least $1,000 in QBI from active trades or companies in which they materially participate.
2.Disaster-related deductions: Disaster-related deductions are commonly defined as casualty loss deductions that taxpayers can claim for damages or losses caused by federally declared disasters. These deductions are intended to assist individuals and businesses in reducing financial difficulties caused by natural disasters such as hurricanes, earthquakes, and flooding. Disaster-related losses from federally designated catastrophes can be claimed as qualifying disaster losses, which provide special tax benefits. These losses can be deducted in addition to standard or itemized deductions, eliminating the need to itemize other deductions on your tax return.
3.Senior Deduction: The OBBBA has added a temporary senior deduction for the years 2025 to 2028. This deduction is $6,000 for qualifying single filers aged 65 and over, and $12,000 for married couples filing jointly who are both 65 or older. The deduction is phased off when AGI reaches $150,000 for married joint filers or $75,000 for others. It does not replace the increased standard deduction available to persons aged 65 and above.
4.Non-itemizer charitable deduction: The One Big Beautiful Bill (OBBB) created the non-itemizer charitable deduction, which is available for tax years beginning in 2026. This deduction is available for proven cash only donations, with a limit of $1,000 for single filers and $2,000 for married couples filing jointly. Donations to donor-advised funds and non-operating private foundations are not eligible for this deduction.
5. Car Loan Interest Deduction: The One Big Beautiful Bill Act (OBBBA) provides a temporary car loan interest deduction from 2025 to 2028. The car must be new and intended for personal usage. It must hold its final assembly in the United States. The loan must be backed by the vehicle and originate after December 31, 2024. The maximum annual deduction is $10,000. The deduction begins to phase out for taxpayers with Modified Adjusted Gross Income (MAGI) of more than $100,000 for single filers and $200,000 for joint filers.
6.Tips Deduction: The OBBBA tips deduction is only available for the tax years 2025 to 2028. Deductible tips are limited to $25,000 per tax return. To be eligible, tips must have been received in an occupation that typically and regularly accepted tips prior to December 31, 2024. The IRS plans to publish a list of qualified occupations. The deduction lowers federal income taxes, although tips are still subject to Social Security and Medicare taxes (FICA). In addition, the deduction is lowered for higher-income earners, beginning at a Modified Adjusted Gross Income (MAGI) of $150,000 for single filers and $300,000 for married couples filing jointly.
7.Overtime Pay Deduction: The OBBBA includes an overtime pay deduction for tax years 2025 through 2028. The maximum yearly deduction for solo filers is $12,500, while married couples filing jointly can claim $25,000. Only the premium component of overtime pay is deductible. For "time-and-a-half" compensation, this is the "half" that surpasses your regular rate. To be qualified, the taxpayer must be a W-2 employee, with overtime mandated by the Fair Labor Standards Act (FLSA). The deduction begins to phase out for taxpayers with a modified AGI of more than $150,000 for single filers and $300,000 for joint filers.
In conclusion, while itemizing deductions frequently gets a lot of attention, it's important to remember that many deductions are still accessible even if you don't itemize. These can have a major influence on your taxable income, opening you chances for tax savings in a variety of situations. Whether it's deductions for student loan interest, educator expenditures, or specific retirement plan contributions, knowing about these options might make a big impact come tax season.
For taxpayers, the decision to take the standard deduction or itemize deductions is critical. The OBBBA increased the standard deduction for 2025 to $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of households. Meanwhile, itemized deductions include medical expenditures, property taxes, mortgage interest, and charitable contributions. Choosing the best path—whether to continue with the simplicity of the standard deduction or to get into the specifics with itemized deductions—depends on your individual financial situation. Whatever method you select, maximizing your permissible deductions assures that you keep more of your earnings.
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