The IRS allows certain deductions from your income before you need to compute your tax liability. Depending upon your filing status and your personal circumstances over the past year, you need to determine if you are going to itemize your deductions or take what the IRS defines as the “standard deduction.” This standard deduction is a dollar amount that non-itemizers may subtract from their income based upon their filing status: single ($6,200), married filing jointly ($12,400), married filing separately ($6,200), head of household ($9,100), and qualifying surviving spouse ($12,400). Taxpayers who are at least 65 or who are blind may increase their standard deduction by $1,200 if they are married and $1,550 if they are single or a head of a household. The IRS provides an online tool to help you compute your standard deduction.
“Taxpayers opting for the standard deduction, however, do have additional considerations available to them for reducing their tax bill that are known as “above-the-line” deductions,” says John Steffee, CPA, a shareholder in Pfister and Rompalo, PC in Wormleysburg, Pa.
Steffee, a member of the Pennsylvania Institute of Certified Public Accounts Image Enhancement and Personal Financial Planning Committees, offers advice on the following above-the-line deductions that are available to taxpayers who do not itemize all deductions and opt for the standard deduction.
Student Loan Interest
The first $2,500 of interest on a loan used solely to pay qualified education expenses for a student enrolled more than half-time in a graduate or undergraduate degree program qualifies as an above the line deduction. The ability to deduct this interest phases out as adjusted gross income exceeds $65,000 for single filers and $130,000 for married filing jointly filers.
Alimony Expenses
Alimony payments made as a result of divorce decree or written separation agreement are deductible as long as the recipient’s Social Security number is provided.
One half of self-employment tax
Sole proprietors and some general partners must pay both the employer and employee halves of the Social Security and Medicare tax on their self-employment earnings. They may then deduct one half of this tax as an above-the-line deduction.
Retirement plan contributions
Eligible contributions to a regular IRA (Roth IRA contributions do not qualify), a self-employed pension plan, SIMPLE IRAs by a nonemployee taxpayer, and other qualified plans may be above-the-line deductions. Each plan has its own set of rules for how much may be contributed to the plan and whether or not certain deduction phase-out rules apply.
Health savings account contributions
Taxpayer payments into high-deductible health insurance plans are deductible above the line. The deductible limits are $3,300 for single coverage and $6,550 for a family plan. Taxpayers over 50 may increase the contribution limit by $1,000.
Moving Expenses
The cost of moving household goods are deductible above the line as long as the move decreases the commuting distance from an old job to a new job by at least 50 miles. Travel expenses for one trip to the new address as well as certain short term storage costs also qualify for the deduction.
Early withdrawal penalties
Any penalty for withdrawing money from a certificate of deposit or savings account before the maturity date is an above-the-line deduction.
Qualified education expenses
For those taxpayers who may not be able to use certain education credits, an above the line deduction is available for the first $4,000 of qualified education expenses. The deduction limit is cut in half when the income of single filers exceeds $65,000 and married filing jointly filers exceeds $130,000. No deduction is available when the income of single filers exceeds $80,000 and married filing jointly filers exceeds $160,000.
Health insurance for the self-employed
Sole proprietors and certain general partners may deduct their health insurance premiums above the line. The deduction may not exceed the taxpayer’s self-employment income less the other above the line deductions for retirement plans and one half of their self-employment tax.
(Taxes can be complicated. For more resources on this topic or to find a CPA in Pennsylvania by location or area of expertise, visit www.picpa.org/taxhelp.)