When it comes to federal income taxes, your focus needs to be to pay just what’s appropriate, nothing more. Because your tax liability is determined by your net income, the surest way to reduce the taxes you pay is to minimize your income. Of course, you must do this without illegally reducing your income. You can do this by taking legal above-the-line tax deductions.
Above-the-line-tax deductions are more like tax breaks that are adjustments to your income. They’re called above-the-line because they are reduced on the first page of the tax return just above the last line. These deductions limit your adjustable gross income and effectively reduce your tax liability.
The following are some above-the-line tax deductions that are discussed in our Tax Guide which you should take if you are eligible.
• Moving expenses, if you moved for employment purposes.
• Self-employment. Half the amount of taxes that are paid to Social Security and Medicare.
• Self-employed retirement plans.
• Self-employed health insurance. The total amount you pay in health insurance premiums not only for yourself, but for your spouse and dependents as well. Even contributions towards long-term care policies are included.
• Penalties paid for early withdrawal of savings. The account manager of such an account should send you a 1099-INT or 1099-OID form including the early withdrawal penalty.
• Alimony payments. If you became divorced and paying alimony, you can deduct these payments from your income. You must provide your ex-spouse’s social security number; or the deduction might be disallowed.
• IRA deductions for amounts contributed to traditional IRAs for people who are self-employed.
• Student loan interest. Up to $2,500 in student loan interest paid can be deducted for single filers making $65,000 or less or joint filers making $135,000 or less.
• Jury duty pay if it was turned over to your employer.
Individuals can obtain most of these above-the-line tax deductions by using the long form, 1040. If you would rather use the short from, 1040A, you can still take a few of these deductions. Early account withdrawal penalties, IRA contributions, student loan interest and jury pay are the above-the-line-tax deductions that may be claimed on the 1040A tax return. Consult with your personal tax consultant for more details or check out this Review of Domain Tax Guides.
