Tax filers might assume that tax deductions are reserved for those filers who itemize on their tax returns.
But if you take the standard deduction, don’t feel left out. Taxpayers can take certain deductions, called above-the-line deductions, even if they don’t itemize. That means they don’t have to spell out every deduction on their tax return. Instead, they can take the standard deduction and still qualify to write off these expenses. “It’s a way to save money on taxes,” says Dave Fultz, a partner with Barsz Gowie Amon & Fultz, located outside Philadelphia.
[See: 15 Tax Questions — Answered.]
Taking an above-the-line deduction lowers adjusted gross income, says Gina Chironis, a certified public accountant and personal financial specialist in Irvine, California. You want that AGI to be as low as possible because a reduced number can slash your tax liability and qualify you for certain tax credits, she says.
Taxpayers who claim above-the-line deductions will use a tax form called Schedule 1 to tally the appropriate write-offs, then subtract the amount from their total income on Form 1040.
Here are some common above-the-line deductions to know:
— IRA deduction.
— Health savings account deduction.
— Student loan interest deduction.
— Educator expense deduction.
— Self-employment deductions.
— Alimony deduction.
— Moving expenses for armed forces deduction.
Read on to determine whether you qualify for these deductions.
For many taxpayers, an individual retirement account, or IRA, is an important component of their retirement-saving and tax-planning strategies. Individuals who qualify can contribute up to $5,500 in 2018 to an IRA. For 2019 contributions, that amount has increased to $6,000. Those who are age 50 or older can contribute an additional $1,000 catch-up amount.
Filers who make contributions to an IRA don’t need to itemize to deduct that income from their taxes. Instead, they take it as an above-the-line deduction, meaning they can claim it even if they use the standard deduction.
One nice thing about the IRA deduction is that filers can make deductible IRA contributions for 2018 until April 15, 2019. When they make contributions, they should let their plan administrator know that it’s earmarked for last year’s income, not this year’s.
An important caveat about IRAs: To qualify for this beneficial tax treatment, you must meet certain eligibility requirements. First, you or your spouse must have earned income, like that from a job or side hustle. Second, if a taxpayer or his spouse are actively contributing to certain employer-sponsored retirement plans, they lose the ability to deduct their contributions if their income is above certain thresholds, which are called “phaseouts.”
If both spouses participate in an employer-sponsored plan, those phaseouts are between $64,000 and $74,000 for 2019 modified adjusted gross income, or MAGI, for single filers and $103,000 and $123,000 for those married filing jointly. If only one spouse is participating, the phaseouts are between $103,000 and $123,000 for the active participant spouse and $193,000 and $203,000 for the nonactive participant spouse.
If this sounds confusing, schedule a meeting with your financial advisor or tax planner. “If you participate in a retirement plan through work, you should talk to a tax professional to determine if you’re eligible for the full or partial deduction of your contribution to an IRA,” Fultz says.
Health Savings Account Deduction
If you are enrolled in a high-deductible health insurance plan, contributions made to your health savings account, called an HSA, may be written off as above-the-line deductions. Your health savings account is a dedicated investment account for qualified medical expenses.
For 2018 income, you can deduct contributions up to $3,450 as a singleton and $6,900 if you have family insurance coverage. For 2019 income, those amounts increase to $3,500 for singles and $7,000 for families.
Fultz notes that if you have an HSA, your employer may allow you to fund it directly from payroll deductions. Those would be pretax deductions that — as a cherry on top — wouldn’t be counted when calculating certain payroll taxes such as Social Security and Medicare tax. What you would report on your Schedule 1 tax form would be any outside-of-payroll contributions to your HSA, which will reduce your adjusted gross income but won’t save you from paying those additional payroll taxes on the amount.
Student Loan Interest Deduction
This above-the-line deduction takes some pain out of your pesky student loan bill. If you repaid eligible higher education loans in 2018, you can deduct up to $2,500 in interest as an above-the-line deduction.
Filers who earned above certain phaseout amounts won’t receive this benefit. Those thresholds are between a modified AGI of $65,000 to $80,000 for single filers and $135,000 to $165,000 if you’re married filing jointly.
Educator Expense Deduction
Qualified teachers can deduct up to $250 (or $500 if married filing jointly and you’re both teachers) as an above-the-line deduction. No itemizing is necessary. Typical expenses are those for books, supplies and computer equipment. Teachers who want to claim this deduction “should keep receipts of the amount of unreimbursed supplies” Fultz says.
Self-employed taxpayers may deduct the employer share of their payroll taxes, contributions to eligible self-employed retirement plans and certain contributions to health insurance. The rules are complex for setting up and claiming these plans appropriately on your taxes, so consult a professional with questions.
While the Tax Cuts and Jobs Act nixed the alimony deduction for future divorces, if you have a divorce in effect from before 2018, you will still be able to deduct alimony payments from your taxes.
Moving Expenses for Armed Forces Deduction
Here’s another tweak to the current tax law. Previously, if you moved to a new location for work, you could deduct eligible moving costs. Due to tax reform, this deduction is now only available to qualified members of the armed forces.
In general, these above-the-line deductions are available to qualified taxpayers, regardless of whether they itemize. Keep receipts related to these contributions throughout the year and start thinking about how you can utilize them to reduce your adjusted gross income in future tax years.
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