Above the Line Deductions

“Above the Line” deductions directly reduce your gross income. The result of those deductions from your gross income is called adjusted gross income (AGI), where AGI is considered “The Line.” These reductions can significantly reduce your taxable income and, consequently, your tax liability. Some common “Above the Line” deductions include:

• Retirement Contributions: Contributions to 401(k), 403(b), and Traditional IRA accounts, to name a few.
  • While it is too late to affect 2024 employer account contributions, eligible individuals can still make tax-deductible IRA and SEP IRA contributions for tax year 2024.[1]
  • Often overlooked for non-working spouses is the ability to make a tax deductible “spousal IRA” contribution.  Income limits for deductibility are higher than regular IRA contribution limits and again, there is still time to do this for 2024 taxes.[2]
• Student Loan Interest: Deduction for interest paid on qualified student loans.
• Health Savings Account (HSA) Contributions: Contributions to HSAs for eligible individuals.
• Self-Employment Taxes: Deduction for a portion of self-employment taxes paid.
• Self-Employment Health Insurance: Deduction for health insurance premiums paid by self-employed individuals.

Example: If you are single and earn $275,000 per year in 2025 and contribute $20,000 to your 401(k), you can effectively reduce your taxable income by $20,000. Depending on your tax bracket (which marginal tax rate is 35% for this income level), this could result in a tax savings of $7,000 meaning that your $20,000 contribution only cost you $13,000. Above the Line deductions are calculated on Schedule 1 of your 1040.

Standard Deduction and Itemized Deductions

If AGI is considered “The Line” you have two primary options that are “Below the Line” that will help reduce your taxable income, 1. Standard Deductions and 2. Itemized Deductions

The Standard Deduction is a fixed amount that you can subtract from your taxable income, regardless of your actual expenses. It simplifies the tax filing process and offers a straightforward way to reduce your tax liability. For tax filings in 2025, i.e. taxes on 2024 income, this is at:

• $14,600 for single or married filing separately.
• $29,200 for married couples filing jointly or qualifying surviving spouse.
• $21,900 for head of household.

The other option that the IRS recognizes is the Itemized Deduction method. Under this method certain expenses that the IRS has specifically identified can be categorized and aggregated.  If those eligible expenses exceed the Standard Deduction amount, itemizing may provide a greater tax benefit. Most tax software packages look at both options and default to the more beneficial option. Common itemized deductions include the following, with a more exhaustive list on Schedule A.

• Mortgage Interest: Interest paid on your home mortgage.
• Property taxes and State and Local income Taxes: (up to a combined $10,000 limit).
• Charitable Contributions: Donations to qualified charitable organizations.
• Medical Expenses: Medical and dental expenses exceeding a certain percentage of your adjusted gross income.

The Power of Tax Credits

Not to be forgotten, while deductions reduce your taxable income, tax credits directly reduce the amount of tax you owe (example below). You may have heard of the tax credits that are tied to the purchase of electric vehicles or home improvements surrounding energy efficiency. These types of credits were enacted, renewed, or enhanced under the Inflation Reduction Act.

Example: if you qualify for a $2,000 tax credit, your tax liability will be reduced by $2,000, regardless of your tax bracket. If you owed $8,000 prior to the tax credit, with the tax credit that will be reduced to $6,000. This makes tax credits more valuable than deductions.  

It is uncertain, however, if the current administration will repeal the Inflation Reduction Act in whole or in part, or let it continue. For that reason, pursuing this strategy with an expectation of tax benefit in 2025 should be done cautiously until the legislative uncertainty is removed.

Plan Today for 2025 Tax Obligations

Understanding these tax concepts can help you initiate an income tax plan throughout 2025. By reviewing and adjusting your income, investment, and expense strategies throughout the year, you can work toward minimizing your tax burden. Remember, taxes are complicated so talk to a financial advisor and tax professional to help make more informed decisions. 

[1] These contributions are based on income level; employment status and access to a retirement account through your employer.  Contact your ENVEST advisor for clarity on this potentially complicated topic.
[2] Same as above