Focusing on the right deductions: Above-the-line vs. Itemized
KEY TAKEAWAYS
Retirement contributions drive your taxable income
HSAs provide immediate and long-term tax savings
SALT could be hurting your deductions
Think strategically to maximize your donations
If you want to make the greatest impact on your tax return, then it’s important to understand the difference between above-the-line and itemized tax deductions.
Above-the-line deductions are the most valuable because they have a direct impact on your taxable income.
Itemized deductions, on the other hand, can only be claimed if they are greater than the standard deduction ($14,600 for single filers and $29,200 for married filers in 2024). That “if” makes itemized deductions less valuable, yet these are often the deductions people focus on most.
Here are some examples of the most common deductions.
Common Above-The-Line Deductions
Retirement Plan Contributions
If your employer offers a 401(k) or 403(b) Plan, then your contribution strategy directly impacts your taxable income. Any Pre-Tax contributions are fully deductible up to the 2024 IRS Plan limits of $23,000, or $30,500 if you're age 50 or older.
Some employers also offer a 457 (Deferred Compensation) Plan to executive-level employees. While these Plans can offer significant additional tax-deferred savings opportunities, you should carefully consider the different laws and distribution rules that apply before participating.
If your employer doesn’t offer a retirement plan, then Traditional IRA contributions are fully deductible. The annual contribution limit in 2024 is $7,000, or $8,000 if you're age 50 or older.
Self-employed taxpayers can consider using a solo 401(k) or SEP IRA to maximize their retirement and tax savings. These Plans are subject to different rules and contribution limits, so your optimal Plan may change over time.
**NOTE: See our blog on Roth contributions. While contributions are not tax-deductible, Roth contributions may result in fewer overall taxes paid and additional retirement planning benefits.**
Health Savings Account (HSA) Contributions
If you are enrolled in a high deductible health plan (HDHP), then you are eligible to make HSA contributions that are fully deductible up to the plan limits. In 2024, single filers can contribute $4,150, and married filers can contribute $8,300.
If you are 55 or older, then you can make a catch-up contribution of $1,000 over the limit that applies to you.
An HSA is arguably the strongest savings tool because it is the only account that exists where you may never pay taxes.
tax-deductible contributions (also not subject to FICA)
tax-deferred investment growth
tax-free distributions (for qualified medical expenses)
Given the tax-free benefits for medical expenses, an HSA is a great complement or alternative to Long-Term Care insurance.
Alimony (Maintenance)
If you were divorced before 2019, then all maintenance payments required by the divorce decree are fully deductible to the paying spouse. Maintenance payments are then taxable to the receiving spouse.
Child support payments, however, are separate from maintenance and not tax-deductible.
If you were divorced in 2019 or later, then maintenance payments are not tax-deductible to the paying spouse, which may lead to smaller payments for the receiving spouse.
Student Loan Interest
Student loans are a common topic for taxpayers. Depending on your income, you can deduct up to $2,500 per year in interest paid on qualified student loans. In order to qualify for any deduction in 2024, single filers must have an income of less than $95,000, while the limit for married filers is $195,000.
This deduction also applies to parents who may have taken out loans (Parent PLUS loan) to help a child with education expenses.
Common Itemized Deductions
Mortgage Interest & Points
In most cases, the qualified mortgage interest that you pay on your mortgage is tax-deductible, but your original balance cannot exceed the below thresholds to qualify.
Mortgage was taken before December 15, 2017
- Single = $500,000 or less
- Married = $1,000,000 or less
Mortgage was taken after December 15, 2017
- Single = $375,000
- Married = $750,000
Also, any mortgage points paid are tax-deductible on your tax return.
When you pay mortgage points, you are essentially buying down your interest rate. You agree to pay a sizeable upfront fee to have a lower interest rate.
State and Local Taxes (“SALT”)
Prior to the Tax Cuts and Jobs Act (TCJA) in 2018, there was not a cap on state income and property tax deductions. For example, if you paid $10,000 in state income taxes and $10,000 in property taxes, then the full $20,000 was tax-deductible.
After TCJA, these taxes are still deductible but up to a maximum of $10,000. Using the same example from above, you would still pay $20,000 in combined taxes, but only $10,000 is tax-deductible.
The cap on SALT coupled with the significant increase in the standard deduction has resulted in fewer taxpayers claiming their itemized deductions.
Donations
If you donate cash, checks, or other items of value to a qualified organization, like a 501(c)(3), then the donations may be tax-deductible.
The increased standard deduction prevents most taxpayers from realizing a tax benefit on donations. To make the most of your donations, here are a few strategies to consider:
Donate appreciated investments instead of cash.
Don't need your RMD? Consider a Qualified Charitable Distribution.
Use a Donor Advised Fund for long-term gift goals.
Bunching donations to allow you to Itemize
It’s worth noting that if you receive a benefit from the contribution - merchandise, goods, services, or admission to an event - then you can’t claim a full deduction. You need to subtract the value of the benefit received from your contribution to determine the deductible amount.
Medical and Dental Expenses
While medical and dental expenses are eligible as itemized deductions, they are not common deductions because you can only deduct the expenses that exceed 7.5% of your adjusted gross income. For example, if your AGI is $100,000 and your medical expenses are $10,000, then you can only deduct $2,500 of those expenses because the first $7,500 (7.5%) is not tax-deductible.
Conclusion
Think of your tax return as your report card. It reflects what you have done throughout the year to manage your tax exposure. Every year, sit down with your advisor and/or CPA to identify what’s driving your return and if there are any changes to consider.
Just remember to think big picture. In cases like Roth contributions, sometimes paying taxes now can be the best strategy.
The goal isn't to pay fewer taxes this year. It's to pay fewer taxes, period.
Frank Iozzo, CPWA®
President, Private Wealth Advisor
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