It'd be nice if we could just label above- or below-the-line deductions based on gut feelings. Like, hey – good for you for donating to charity! Very above-the-line. You lost $2,000 in stock? Well, that's too bad, but it's not well-intentioned enough; below-the-line it is. In our pretend made-up tax world, "the line" is some sort of vaguely moral point that signals you're above-board. Unsurprisingly, the Internal Revenue Service's (IRS's) "line" is pretty black-and-white and doesn't have a lot of room for philosophical debate.
Here's the deal: The real line is your adjusted gross income, or AGI. In general, deductions are adjustments to your income. So this is simple: Take a $400 deduction, and you can cut $400 from your AGI – and thus get taxed for $400 less. Easy!
Not so fast, citizen taxpayer. That may be true for some deductions, but not all. That's where the above- and below-the-line distinction comes in. Above-the-line deductions work much like we described above: You take your entire income and then subtract from it. This is pretty cool, since your AGI is used to compute lots of different tax numbers. The lower it is, the more beneficial it will be to your bottom line.
Below-the-line adjustments are a little different. And let's be frank: They don't help you quite as much. While above-the-line deductions change your AGI, below-the-line deductions may not lower your taxable income. That's because those below-the-line adjustments have to amount to more than the standard deduction to make a lick of difference. So unless your itemized, below-the-line deductions equal more than the standard deduction, they're not worth it. Above-the-line deductions are always worthwhile because they'll lower that AGI no matter what.
Unfortunately, above-the-line deductions aren't a free-for-all. Any interest on a student loan, for instance, can be taken out of the AGI – up to $2,500, that is. Moving expenses can be deducted, but you must meet certain criteria – and filling out another form [source: IRS]. Alimony, stock losses, moving and rental deductions are also above-the-line candidates.
And it seems obvious, but it's important to remember to keep any receipts or paperwork for any deduction you're claiming. Above- and below-the-line deductions may not have anything to do with a monetary moral high ground, but keeping a paper trail will help you prove that you're not taking part in any funny business.