Is Mortgage Interest an Above the Line Deduction?
An above-the-line tax deduction is a deduction that is entered on a federal form 1040, page one. The line that is referenced is line 37 of the federal form 1040 and the taxpayer's adjusted gross income is listed there. Officially, above the line deductions are referred to as adjustments to income. There are many different types of tax deductions in the United States Tax Code.
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Standard Deductions
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The standard deduction is an amount that a taxpayer claims to reduce his taxable income. The taxpayer does not need to split up the deduction into permissible categories, but he can claim a standard amount. This amount does not have to be verified and validated by receipts. It is a fixed amount that you are allowed to claim, depending on your filing status.
Above-the-Line Deductions
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Above-the-line deductions are deductions taken on the first page of a federal form 1040. Most of the time, you must fill out another form to take advantage of the deduction or adjustment. Some examples of above-the-line deductions are a small business loss, expenses that teachers pay for school supplies, IRA contributions and health savings account contributions. The above-the-line deduction lowers the adjusted gross income amount. Since many tax breaks and deductions depend on the adjusted gross income being as low as possible, it is generally desirable to have as many above-the-line deductions as possible.
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Itemized Deductions
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A taxpayer itemizes, or lists separately, deductions on a form 1040, schedule A. Certain deductions qualify for this, such as local taxes, casualty losses and charitable contributions. A taxpayer saves receipts, and calculates the total amount that he has incurred for allowable expenses during the year. After entering the total amounts by category on schedule A, he adds the categories to figure the total allowable itemized deductions. You can deduct the higher of the standard or itemized deductions from your taxable income.
Mortgage Interest
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Mortgage interest is also claimed on the schedule A itemized deductions form. Schedule A deductions are listed on the second page of the tax form 1040, and the amount of itemized deductions does not affect the total adjusted gross income. Because of this, mortgage interest generally is NOT an above-the-line tax deduction, and has no effect on the adjusted gross income.
Mortgage Interest - Sometimes Above the Line?
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Schedule C, or business profit and loss, is put on the tax return before the adjusted gross income is calculated. IRS tax rules allow you to claim a percentage of business use of the home expenses, depending on how much of your home was used for business. If you use part of your home for business, you may be able to deduct a percentage of the mortgage interest as a business use of the home expense. Of course, that amount that you deduct is subtracted from the schedule A itemized deduction form. By using part of your home for business, you have converted part of an itemized deduction to an above-the-line deduction, and reduced your adjusted gross income.
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References
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