Don't itemize? Don't worry. Above-the-line deductions can help reduce your tax bill
Monday, April 10, 2017
Most of us — Internal Revenue Service data shows around 70 percent of taxpayers — don't mess with itemized deductions. Instead this large group of filers claims the standard deduction.
It's easy. The amount to claim is based on your filing status and found directly on the 1040 and 1040A forms; it's included with the personal exemption amount(s) on 1040EZ.
It's also adjusted annually for inflation, so generally if you make more the next tax year, your standard deduction is larger.
But sometimes standard deduction claimants feel a bit left out at tax time, since so much is written (guilty!) about itemized tax breaks.
Well, here's some good news for you if you don't mess with keeping receipts and filling out Schedule A. You can claim the standard deduction and also claim any of the more than a dozen tax breaks found directly on tax return forms 1040 and 1040A.
Above-the-line tax deductions: These options technically are known as adjustments to income.
However, they're often referred to as above-the-line deductions because they're found at the bottom of page 1 of Form 1040 and 1040A just above those pages' last line.
Form 1040 has the most, more than dozen. Four are found on Form 1040A. Sorry, true to its "easy" name, the 1040EZ has no above-the-line deductions.
Today's Daily Tax Tip offers a quick look at the above-the-line options on the 1040 and 1040A.
Form 1040 income adjustments
There are more than a dozen above-the-line deductions found on the 2016 version of Form 1040.
Line 23, Educator expenses: Teachers and other qualified school employees can write off up to $250 of unreimbursed personal money spent last year on classroom supplies. This tax for years was part of the extenders package, meaning it had to be renewed every year or so by Congress, sometimes at the very last minute. It was made a permanent part of the tax code (at least until we get the Trump-GOP promised tax reform) in late 2015. As part of that legislation, the amount of out-of-pocket classroom expenses also is indexed for inflation so in future years the tax break could exceed $250.
Line 24, Certain business expenses: This applies to special job categories -- military reservists, performing artists and fee-basis government officials. You'll need to also fill out Form 2106 or 2106-EZ. But that little bit of extra work is still better that what's required of other workers with unreimbursed employee expenses. They still must claim them on Schedule A and meet that deduction's 2 percent threshold.
Line 25, Health savings accounts: Here you can write off your contributions to one of these medical coverage plans, commonly referred to as HSAs. You'll need more paperwork here, too, Form 8889.
Line 26, Moving expenses: Under certain circumstances, many of your relocation costs can be deducted from your gross income on this line. Fill out Form 3903 to determine the deductible amount.
Line 27, Self-employment tax: If you worked for yourself, either full-time or as a side job to bring in some extra spending money, you likely had to pay self-employment tax. Half of that amount can be subtracted here.
Line 28, Self-employed retirement plan contributions: Staying in the be-your-own-boss vein, if you were able to contribute to a retirement plan (e.g., SEP-IRA or Keogh), note that amount here.
Line 29, Self-employed health insurance premiums: One more break for the independent worker. If you paid for your own medical policy, those premiums are fully deductible here.
Line 30, Early savings withdrawal penalties: If you had to cash in a CD and paid the price at your bank, you now can write off that fee.
Line 31, Alimony: This is for the paying ex-spouse, not the recipient. You can deduct this support money -- but not any funds you paid to take care of your kids.
Line 32, IRA contribution: If you have a traditional IRA, you might be able to deduct some or all of your contribution.
Line 33, Student loan interest: Write off up to $2,500 in interest on your school debt here. This write-off is on line 18 of the 1040A.
Line 34, Tuition and fees: If you can claim the tuition and fees tax break, you can enter up to $4,000 of those costs here. Use Form 8917 to determine your deduction amount. Taking a good look at this one; this filing season could be the last time it's available. Like the educators' expenses, it was part of tax extenders, but so far it has not been renewed beyond the 2016 tax year.
Line 35, Domestic production activities: This very specific line item is for taxpayers in the construction, farming or even some artistic fields (films and recordings). If you manufacture your product within U.S. borders, this deduction could help you get to a lower AGI amount. Form 8903 is needed to claim this tax break.
OK, a look at the Form 1040 excerpt above indicates that the 13th above-the-line deduction on line 35 is the last one, right? Wrong!
Although line 36 says to add lines 23 through 35, the IRS has jammed 10 more above-the-line deduction options here.
A review of the 1040 instruction book reveals that Line 36 is also where you can deduct a variety of specialized expenses, such as:
- Archer MSA deduction (see Form 8853). Identify as "MSA" on line 36.
- Jury duty pay if you gave the pay to your employer because your employer paid your salary while you served on the jury. Identify as "Jury Pay."
- Deductible expenses related to income reported on line 21 from the rental of personal property engaged in for profit. Identify as "PPR."
- Nontaxable amount of the value of Olympic and Paralympic medals and USOC prize money reported on line 21. Identify as "USOC."
- Reforestation amortization and expenses (see IRS Publication 535). Identify as "RFST."
- Repayment of supplemental unemployment benefits under the Trade Act of 1974 (see IRS Publication 525). Identify as "Sub-Pay TRA."
- Contributions to section 501(c)(18)(D) pension plans (see IRS Publication 525). Identify as "501(c)(18)(D)."
- Contributions by certain chaplains to section 403(b) plans (see IRS Publication 517). Identify as "403(b)."
- Attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the extent of gross income from such actions (see IRS Publication 525). Identify as "UDC."
- Attorney fees and court costs you paid in connection with an award from the IRS for information you provided that helped the IRS detect tax law violations, up to the amount of the award includible in your gross income. Identify as "WBF."
Yeah, most of these apply to very few taxpayers. But if you're one of them, be sure to take advantage when you file.
Form 1040A income adjustments
Four of the most-commonly claimed above-the-line deductions also are found on the 2016 edition of the shorter 1040A tax return.
Line 16, Educator expenses for up to $250 (inflation adjusted next year maybe) spent by teachers and other school employees on classroom supplies.
Line 17, IRA contribution to subtract from your income, if eligible, some or all of your traditional IRA contributions for the tax year.
Line 18, Student loan interest so you can write off up to $2,500 in interest on your college loan.
Line 19, Tuition and fees for claiming up to $4,000 in some college costs. Again, the 2016 tax year could be the last year for this above-the-line deduction.
If one (or more) of these four above-the-line deductions applies to your tax situation and you can file Form 1040A, then use this shorter form.
Deductions for all: The beauty of these adjustments — in addition to not having to mess with Schedule A and its many income limitations — is that above-the-line deductions will knock your gross, or total, income down to a lower adjusted gross income, or AGI, amount.
That's the figure you enter on that last line of page 1 of Form 1040 or 1040A. A lower AGI generally means a lower tax bill.
And if you do itemize (more on this tomorrow), don't ignore these myriad adjustments to income. Every one of the above-the-line deductions is available to all qualifying taxpayers regardless of which deduction method they use.
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