I recently had an email exchange with an Oblivious Investor reader about the (new for 2026) deduction of $1,000 ($2,000 if married filing jointly) for charitable contributions, for people who don’t itemize. The question was whether the deduction reduces adjusted gross income (AGI) or not.

The short answer is that, no, it does not reduce adjusted gross income.

But what’s perhaps more interesting is the conversation the reader was having at the same time, with Gemini AI, about the same topic. The reader had asked whether the deduction is an “above the line” or “below the line” deduction.

And the AI gave an answer that was frankly nonsensical. That’s likely because there’s conflicting writing on the internet about this topic, in part because the terms “above the line” and “below the line” are no longer sufficient to describe the categories of deductions that we have.

We used to have only:

1. Adjustments to gross income (i.e., things that reduce adjusted gross income), which were known as above-the-line deductions.
2. Itemized deductions, which were known as below-the-line deductions.

These days, we have a third category of deductions, which do not reduce adjusted gross income but which are not itemized deductions. Included in this category are:

1. The $1,000 ($2,000 if MFJ) deduction in question for charitable contributions.
2. The deduction for qualified business income (i.e., pass-through income).
3. The deduction for qualified tip income.
4. The deduction for qualified overtime income.
5. The deduction for vehicle loan interest.
6. The enhanced senior deduction.

Some people are calling these deductions “above the line” because they aren’t itemized. And some people are calling them “below the line” because they do not reduce adjusted gross income. And so human readers reading these different articles — as well as AI chatbots being trained on these articles — get confused.

When Gemini was asked to look specifically at the law itself and help interpret that, Gemini answered that it’s an above the line deduction, reducing AGI. Here’s Gemini’s explanation:

The specific language in Section 70424 of the Act that executes this change is as follows:

“(b) DEDUCTION ALLOWED IN COMPUTING ADJUSTED GROSS INCOME.—”

“Section 62(a) of the Internal Revenue Code of 1986 is amended by inserting after paragraph (21) the following new paragraph:”

“(22) CHARITABLE CONTRIBUTIONS OF INDIVIDUALS WHO DO NOT ELECT TO ITEMIZE DEDUCTIONS.— In the case of an individual who does not elect to itemize deductions for the taxable year, the deduction allowed by section 170(p).”

Gemini’s reasoning makes perfect sense — or it would, if that wording actually existed in the legislation. But it doesn’t. The entire wording Gemini is quoting is completely hallucinated. It doesn’t appear in the actual text of the law at all.

It’s remarkable though that the wording Gemini is providing is exactly what the law would say, if it were trying to make the deduction an adjustment to income. The AI is being very clever here — it just fundamentally misunderstands the assignment. It found wording from other pieces of legislation, in which a new deduction was made an adjustment to income. And it modified the wording exactly as needed, to fit the new context.

It’s exactly the sort of thing you’d want if you were using it to help write software code: finding something that worked in a very similar situation, and then modifying it in just the right way to fit this new situation.

But that’s precisely the opposite of what we want in tax research. We don’t want it to create new wording. We need it to specifically look at the wording that is there, understand that wording, and explain it to us.

AI chatbots can be very helpful, for a range of different tasks. But they can still get things wrong — and in ways in which no human ever would. (A human may very well answer the same tax question incorrectly, but no human in their right mind would completely fabricate a bunch of legislative wording as part of their answer.)

If you want to use AIs for tax research, there are a few things that can help improve the results:

• In your permanent account settings, give it some information along the lines of “Correctness is always a critical concern. If you are ever unsure of anything, please let me know and/or ask questions. Please never give me an answer of which you are unsure.” (Note though that this can cut down on hallucinations but will not eliminate them, as the model can sometimes be confident but incorrect.)
• In the actual prompt you give, do not only ask it to base its answer on the law, first ask it to find the text of the law itself. Confirm that it has read the text. And then ask your question. For example, start your conversation with: “Please look on the law.cornell.edu website for the IRC section about health savings accounts. Please find and read that.” And then go from there, with whatever questions you have about HSAs.
• And for any points that are absolutely critical (i.e., points where it would be very problematic if the information you received was wrong), ask it specifically where it is finding the information in question. And then go confirm that for yourself. Acceptable sources include Internal Revenue Code sections, Treasury Regulations, Revenue Rulings, Revenue Procedures, and judicial decisions. IRS publications or articles anywhere (including IRS.gov) are not sufficient.

It’s critical to understand that AIs do not behave the same way that humans do. The situations in which AIs make mistakes, and the ways in which they make mistakes, are different than for humans. So if you’re going to rely on AI answers for critical topics, you have to be thorough/explicit about confirming the information on your own.

I often think of an AI chatbot as an employee that is: smart, extremely eager to please, hardworking, and literally an alien from another planet. Imagine that that’s who you have sitting on a stool next to you. It’s ready to work! But you can’t assume that it will understand you in the same way that a human would. They can not only get things wrong, they can sometimes fundamentally misunderstand the assignment in a way that no human would (as in the case above, in which it decided that making up tax law was what the user wanted).

A rule of thumb that’s becoming increasingly popular is to do Roth conversions in retirement to the top of the 12% bracket and no higher.

Any rule of thumb is going to have some situations in which it doesn’t work well, but I think this rule of thumb is particularly bad.

Firstly, there are some households for which any conversions are likely to be unhelpful, due to their charitable plans (i.e., they plan to make extensive use of qualified charitable distributions, and they have charities named as the beneficiaries of their tax-deferred accounts). When that’s the case, any current conversions are largely money down the drain. Much of the dollars in question would face a 0% tax rate later, so why pay even a 12% tax rate right now?

And on the other side, there are a variety of factors that would make conversions beyond 12% likely to be beneficial (e.g., super large tax-deferred accounts, such that we’re likely to see a high tax rate on RMDs, or beneficiaries with very high income levels of their own, such that they’d likely pay very high tax rates on inherited tax-deferred accounts).

But the most fatal flaw with the rule of thumb in question is that, for many retiree households, the “up to the top of the 12% bracket” range often includes stuff that will make the tax rate paid on the conversion meaningfully higher than 12%. The most common such things are the unique tax treatment of Social Security benefits (i.e., each dollar of conversion income also causes some Social Security benefits to become taxable) and the phaseout of Affordable Care Act subsidies (i.e., conversion income is causing the premium tax credit to shrink/disappear and potentially causing the loss of cost sharing reductions).

For many retirees (in particular, households where somebody is buying insurance on the exchange or somebody is already receiving Social Security), their marginal tax rate in much of the 12% bracket actually exceeds 20%. And if that’s advantageous, then conversions into the 22% bracket are often likely a good idea as well (because in many cases, much of the 22% bracket doesn’t have those additional tax rate effects).

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Many taxpayers in the U.S. have come to expect a sizable refund check every tax season. To some people who don’t prepare their own tax returns, it’s a mystery how the refund is calculated.

The idea is really quite simple. After calculating your taxable income, you use the information in the tax tables to determine your total income tax for the year. This amount is then compared to the amount that you actually paid throughout the year (in the form of withholdings from your paychecks). If the amount you paid is more than your tax, you are entitled to a refund for the difference. If the amount you paid is less than your tax, it’s time to get out the checkbook.

Withholding: Why It’s Done

If you work as an employee, you’re certainly aware that a large portion of your wages/salary doesn’t actually show up in your paycheck every two weeks. Instead, it gets “withheld.”

The reason for this withholding is that the federal government wants to be absolutely sure that its gets its money. The government knows that many people have a tendency to spend literally all of the income they receive (if not more). As a result, the government set up the system so that it would get its share before taxpayers would have a chance to spend it.

The amount of your pay that gets withheld is based upon an estimate of how much tax you’ll be responsible for paying over the course of the year. (This is why you are required to fill out Form W-4, providing your employer with some tax-related information, when you start a new job.)

Withholding: How It’s Calculated

At this point you may be thinking, “OK. Well I’m in the __% tax bracket, and it’s obvious that my employer is withholding way more than that!”

You’re probably right. That’s because your employer isn’t just withholding for federal income tax. They’re also withholding for Social Security tax, Medicare tax, and (likely) state income tax.

The Social Security tax is calculated as 6.2% of your earnings, and the Medicare tax is calculated as 1.45% of your earnings. Before you’ve even begun to pay your income taxes, 7.65% of your income has been withheld.

Your refund is determined by comparing your total income tax to the amount that was withheld for federal income tax. Assuming that the amount withheld for federal income tax was greater than your income tax for the year, you will receive a refund for the difference.

EXAMPLE: Nick’s total taxable income (after subtracting deductions) is $32,000. He is single. Using the 2026 tax table for single taxpayers, we can determine that his federal income tax is $3,592.

Over the course of the year, Nick’s employer withheld a total of $8,500 from his pay, of which $4,000 went toward federal income tax. His refund will be $408 (i.e., $4,000 minus $3,592).

Simple Summary

• Every year, your refund is calculated as the amount withheld for federal income tax, minus your total federal income tax for the year.
• A large portion of the money being withheld from each of your paychecks does not actually go toward federal income tax. Instead, it goes to pay the Social Security tax, the Medicare tax, and possibly state income tax.

To date, there are more than 1,000 articles published on this blog on a variety of topics — many of them answers to reader questions. A large portion of the email questions I receive deal with either tax brackets or withholding. As far as I can tell, these questions stem from the fact that many (most?) taxpayers do not understand:

1. How tax brackets work, and
2. How the amount withheld for taxes from one’s paychecks can be different from the amount of tax one actually has to pay.

Let’s take a crack at each of those, shall we?

How Do Tax Brackets Work?

Based on the 2026 tax brackets, we can see that for an unmarried taxpayer, the 10% tax bracket goes from $0-$12,400 of taxable income. For example, if John’s taxable income is $12,400, his income tax will be $1,240. Nothing tricky there.

But what if John’s taxable income increases by $1 to $12,401 (thereby putting him in the 12% tax bracket)? How much extra income tax will John pay?

Answer: He’ll pay an additional $0.12 of income tax. That is, only his final dollar of income (the dollar that’s in the 12% tax bracket) will be taxed at 12%. His first $12,400 of income will still be taxed at 10%.

Important conclusion #1: Getting a raise at work that puts you into a higher tax bracket will not reduce your after-tax take-home pay. (Possible exception: The raise could make you ineligible for certain deductions or credits, the loss of which could outweigh the increase in income.)

Important conclusion #2: If you’re trying to get an estimate of how much income tax you’ll owe for a given year, do not simply multiply your income by your marginal tax bracket — doing so would overestimate your tax (by a very wide margin in many cases).

How Does Withholding Work?

From every paycheck, your employer withholds some of your salary/wages to go toward taxes. The Federal government requires this because they understand that many people spend every dime that makes it into their bank account (plus some). By making withholding mandatory, the government gets its money before taxpayers have a chance to spend it.

It’s important to note that the amount of tax that’s withheld over the course of a year goes to more than just Federal income taxes. It also covers:

• Social Security tax (6.2% of your earnings, up to $184,500 for 2026),
• Medicare tax (1.45% of earnings), and
• State/local income tax (if applicable).

In addition, the amount that’s withheld over the course of the year for Federal income tax will not actually equal the amount that you’re responsible for paying that year. This is the result of the fact that your employer doesn’t have all of the information necessary to precisely calculate the tax that you’re responsible for paying. (For example, they don’t know what deductions you’ll claim or how much your spouse earns.)

The fact that the amount that’s withheld does not equal the amount you’re responsible for paying is why tax season is basically a massive “settling up,” during which taxpayers either receive a refund (for the amount by which their withholding exceeded their tax) or write a check to the U.S. Treasury (for the amount by which their tax exceeded their withholding).

One useful thing you can do with your portfolio during market declines is check your taxable accounts for opportunities to tax-loss harvest. (Note: tax-loss harvesting does not apply to IRAs or other tax-sheltered accounts.)

To explain what tax-loss harvesting is, let’s look at an example.

Mary is in the 24% tax bracket. At the beginning of the year, Mary bought $100,000 of Vanguard Total International Stock Index Fund in her taxable account. And let’s imagine that as of today, it’s worth approximately $93,000. To tax-loss harvest, Mary would sell that fund, thereby recognizing a $7,000 capital loss. And Mary would use the proceeds from the sale to purchase another fund to serve as a replacement in her portfolio.

Mary can use the $7,000 capital loss to offset any capital gains she realized this year. And if Mary’s capital losses exceed her capital gains for the year, she can use up to $3,000 of her net capital loss to offset ordinary income, thereby reducing her income tax by $720 (i.e., $3,000 x 24%). If she still has remaining capital losses after that, they can be carried forward to be used in future years (subject to the same limitation).

What’s the Point?

You may have noticed, however, that when you eventually sell the replacement fund, your capital gain will be larger than it would have been had you not tax-loss harvested (because the replacement fund will have been purchased at a lower price than the original fund).

To return to our example above, if Mary uses her $93,000 to purchase Vanguard FTSE All-World Ex-US Index, which she sells a few years later for $130,000, her long-term capital gain will be $37,000 rather than $30,000.

So did Mary still come out ahead? Yes, for a few reasons.

First, if nothing else, she deferred her taxes for a few years — in essence getting an interest-free loan from Uncle Sam.

Second, if she was able to use any of her $7,000 capital loss to offset ordinary income (or short-term capital gains), then the capital loss saved her money at a rate of 24% (because she’s in the 24% tax bracket). When she sells the replacement fund, the long-term capital gain will be taxed at a lower rate (likely 15%).

Finally, if Mary had ended up dying before she sold the fund, the savings from tax-loss harvesting would be pure profit (because her heirs will receive the fund’s current market value as their cost basis when they inherit it).

When to Tax-Loss Harvest

Many investors check for tax-loss harvesting opportunities right before the end of the year — when they start thinking about taxes. While that’s perfectly fine, it can be advantageous to check several times throughout the year. Investments can be volatile, and it’s entirely possible that a tax-loss harvesting opportunity will arise early in the year, only to disappear before year-end.

Potential Pitfall: The Wash Sale Rule

The place where people often trip up is by accidentally triggering the “wash sale” rule. A wash sale occurs when you:

1. Sell an investment for a loss, and
2. Buy “substantially identical” securities within 30 days before or after the sale.

When a wash sale occurs, the loss is disallowed. Fortunately, the cost basis of your new shares is adjusted upward by an amount equal to the disallowed loss so that when you sell the shares in the future — assuming you don’t trigger the wash sale rule yet again — you’ll be able to claim the loss (or, depending on circumstances, a smaller capital gain).

Example: Catherine buys 100 shares of a stock at $38 per share. A few months later, Catherine sells the shares for $25 per share. Five days later, she buys another 100 shares of the same stock at $29 per share. Because she bought new shares within 30 days of the sale, the wash sale rule will be triggered, and Catherine’s loss of $13 per share will be disallowed. Her cost basis in the new shares, however, will be $42 per share ($29 purchase price + $13 from the disallowed loss), thereby allowing for a larger capital loss or smaller capital gain when she sells the shares in the future.

Wash Sales Due to a Spouse’s Transactions

Some investors hope to avoid the wash sale rule by having their spouse buy a particular investment at the same time that they sell it for a loss. But, as explained in IRS Publication 550, this does not work. For the purpose of triggering a wash sale, your spouse buying or selling an investment has the same effect as you buying or selling the investment.

Wash Sales Due to Buying in an IRA

Other investors try to avoid a wash sale by selling an investment for a loss in their taxable account, then buying the same investment in their IRA — with the idea being that the IRA is titled differently than the taxable account, so it would not trigger a wash sale.

This doesn’t work either. Buying a “substantially identical” investment in your IRA (whether Roth or traditional) within 30 days of the sale will result in a wash sale.

Wash Sales Due to Buying Within 30 Days Prior to Sale

Finally, many investors think of wash sales as only occurring if you re-buy the investment shortly after selling it. That is, they forget that a wash sale can occur if you buy shares within 30 days prior to the sale.

Example: On January 1, Josh buys 100 shares of Vanguard Total Stock Market ETF in his brokerage account for $60 per share. On January 15, Josh buys another 100 shares for $58 per share. On January 20, Josh sells 100 shares, at a price of $56 per share. Josh has a wash sale. His loss will be disallowed and added to the cost basis of his remaining 100 shares.

Note, however, that you do not need to worry about wash sales if you liquidate all of your shares of a given investment and you do not repurchase substantially identical securities within 30 days.

Example: On January 1, Lucy buys 100 shares of Vanguard Total Stock Market ETF in her brokerage account, at a price of $60 per share. On January 10, Lucy sells her 100 shares for $55 per share, and she does not purchase substantially identical securities in any of her accounts within the next 30 days. Lucy will be able to claim her loss of $5 per share, despite the fact that a purchase occurred within 30 days prior to the sale.

Wash Sales from Buying in a 401(k)

Update: A few readers asked whether a wash sale can be triggered when, after selling an investment for a loss in a taxable account, substantially identical securities are purchased in a 401(k) or 403(b).

This answer is a bit trickier. Section 1091 of the Internal Revenue Code is the law that creates the wash sale rule. It doesn’t mention retirement accounts at all. The rule about wash sales being triggered from purchases in an IRA comes from IRS Revenue Ruling 2008-5. If you read through the ruling, you’ll see that it speaks specifically to IRAs and does not mention 401(k) or other employer-sponsored retirement plans.

To the best of my knowledge, there is no official IRS ruling that speaks specifically to wash sales being created by a transaction in a 401(k). In other words, I’m not aware of any source of legal authority that clearly says that a purchase in a 401(k) would trigger a wash sale.

However, in my opinion, it seems pretty clear that the line of reasoning in the above-linked revenue ruling would apply to employer-sponsored retirement plans as well as IRAs.

So, personally, I would not be comfortable taking a position on a tax return that’s based on the assumption that purchases in a 401(k) cannot trigger a wash sale. But that’s just my personal opinion. Others may disagree.

What Makes Two Mutual Funds “Substantially Identical”?

Update #2: Several readers also wrote in with questions about how to know whether two mutual funds are “substantially identical” for the purposes of triggering a wash sale.

Unfortunately, I’m not aware of any official IRS position providing a cut-and-dried test to determine whether two mutual funds are substantially identical.

Personally, my standard is this: If the IRS did challenge my position, and I ended up in court having to make the case that these two funds were not substantially identical, would I feel confident about my chance of success? Unless the answer is “yes, absolutely,” I’d choose a different (less similar) mutual fund.

For example, I would not be comfortable making the case that the following are not substantially identical:

• The ETF version and the mutual fund version of a given Vanguard index fund,
• Two index funds or ETFs that track the same index (even if their holdings are not identical), or
• Two “total market” index funds, even if they track slightly different indexes.

In short, I would probably not want to use a given fund as a tax loss harvesting partner for another fund unless I could not only show that the underlying portfolios are different, but also provide a chart showing that the two funds really do perform noticeably differently. But, as with the previous question, this is one in which other people could rationally reach a different conclusion.

Finally, as author Taylor Larimore often reminds investors at the Bogleheads forum: If you want to tax loss harvest with a particular fund, and you don’t want to worry about finding a replacement fund that’s similar but not substantially identical, you can always just wait 31 days after the sale, then re-buy the original fund.

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Given that the tax law is (usually) set up to reward things that Congress has decided are beneficial to our country, it’s no surprise that there are tax breaks available to people paying for higher education expenses.

Education Credits

If you pay higher education expenses for yourself, your spouse, or your dependent, you may be entitled to one (or both) of two credits: the American Opportunity Credit or the Lifetime Learning Credit.

American Opportunity Credit

The American Opportunity Credit is available for expenses paid for students who are in their first four years of postsecondary education and who are enrolled at least “half-time.” The amount of the credit is the sum of the first $2,000 of qualified education expenses paid for the student, plus 25% of the next $2,000 of qualified expenses. (Note that this means that the maximum credit per student is $2,500.)

Your eligibility to claim the American Opportunity Credit begins to decrease as your modified adjusted gross income exceeds $80,000 ($160,000 if married filing jointly). Once your MAGI reaches $90,000 ($180,000 if married filing jointly), you’ll no longer be eligible to use the credit.

In addition, in order to be eligible to claim the American Opportunity Credit, you must not be somebody else’s dependent. So, for example, if you are your parents’ dependent, you cannot claim the American Opportunity Credit, but they may be able to claim the credit for expenses they paid for you.

Qualified education expenses include tuition, fees, and course materials (i.e., books and supplies needed for a course). Room and board does not count as a qualified education expense. As long as an expense is a qualified education expense, it doesn’t matter whether the money used to pay the expense was obtained with a loan.

Lifetime Learning Credit

The Lifetime Learning Credit is similar to the American Opportunity Credit, with a handful of differences.

One major difference is that the credit is designed to be used by people who are going to grad school or going back to school later in life (hence the “lifetime” in the name). Thus, there is no limit to the number of years that the Lifetime Learning Credit can be used for a given student. In addition, there’s no requirement that the student be enrolled at least half-time.

The credit is calculated as 20% of the first $10,000 of qualified education expenses that you pay in a given year. (Note that this means that the maximum credit per tax return is $2,000.)

As with the American Opportunity Credit, your eligibility to claim the Lifetime Learning Credit begins to decrease as your modified adjusted gross income exceeds $80,000 ($160,000 if married filing jointly). Once your MAGI reaches $90,000 ($180,000 if married filing jointly), you’ll no longer be eligible to use the credit.

Also similar to the American Opportunity Credit, you cannot claim the Lifetime Learning Credit if you are somebody else’s dependent.

In order for the education expenses to qualify, the course must be part of a postsecondary degree program or taken by the student to acquire or improve job skills.

For the Lifetime Learning Credit, qualified education expenses includes tuition and fees, as well as course-related expenses that are required to be paid to the institution as a condition for enrollment or attendance.

EXAMPLE: Jack is attending school to be a filmmaker. In addition to his tuition, he’s required to pay $1,00 per semester for use of the school’s film studio. Because he is required to pay the $1,000 to the school in order to attend classes, the expense can be included as a qualifying education expense.

EXAMPLE: Lee is attending school for a degree in Spanish. Each semester, he is required to buy several textbooks to use for his courses. However, because his school doesn’t require him to buy the materials from the school — he could buy them online on Amazon, for instance — the cost does not count as a qualifying education expense.

As with the American Opportunity Credit, room and board expenses do not qualify. Also similarly, it makes no difference whether a loan was used to get the funds to pay a given expense.

How the Credits Work Together

For a given student in a given year, you can claim either the Lifetime Learning Credit or the American Opportunity Credit, not both.

EXAMPLE: Katie and Alex are siblings. Alex is a freshman in college, and Katie is a senior (in her fifth year of college). With the help of some student loans, their family spends $20,000 for tuition for each of them for the year.

The family should probably claim the American Opportunity Credit for Alex, because it will allow for a credit of $2,500, as opposed to the $2,000 that would be allowed via the Lifetime Learning Credit. Also, by not using the Lifetime Learning Credit for Alex, the family can still use the Lifetime Learning Credit for Katie. (Katie is ineligible for the American Opportunity Credit, because she is in her fifth year of college.) In total, the family will be able to claim $4,500 of education-related credits.

Student Loan Interest Deduction

If you pay interest on student loans, you may be able to deduct that interest (up to $2,500 per year) as an “adjustment to income” (sometimes referred to as an “above the line” deduction). In order to qualify:

1. The loan must be taken out solely to pay for qualified higher education expenses,
2. You (and your spouse, if you’re married) must not be claimed as a dependent on another person’s return, and
3. If married, you must file jointly.

The $2,500 limit for the deduction is reduced as your modified adjusted gross income exceeds (for 2026) $85,000 ($175,000 if married filing jointly). Once your modified adjusted gross income reaches $100,000 ($205,000 if married filing jointly), you will no longer be eligible for the deduction.

Simple Summary

• If you pay postsecondary education expenses for yourself, your spouse, or a dependent, you may be eligible for the American Opportunity Credit (of up to $2,500 per student per year).
• If you pay postsecondary education expenses for yourself, your spouse, or your dependent, you may be eligible for the Lifetime Learning Credit (of up to $2,000). Only one Lifetime Learning Credit can be claimed per tax return per year.
• For a given student’s expenses each year, you can use either the American Opportunity Credit or the Lifetime Learning Credit, not both.
• If you pay student loan interest, you may qualify for a deduction for the amount of interest paid, up to $2,500.