YOU DON’T HAVE TO BE RICH TO REDUCE YOUR TAX LIABILITY
In the first part of this series, you learned about starting off your return on the right foot and the importance of your gross income. In this post, we get into ways to reduce your tax liability. And while many of you may think only “the rich” get the good tax breaks, I want to introduce you to simple deductions that everyday people can take.
Adjustments to Your Income
In the tax world, we call the first set of deductions “adjustments to your income” or “above-the-line” deductions. The “line” the title refers to is your Adjusted Gross Income (AGI). Adjustments made before the AGI figure are considered “above the line,” and those made after the figure are “below the line.”
Most people have access to these adjustments as long as they have the qualifying expense. The categories include many common expenses for all of us.
Deductions for Common Expenses
Overall, you can take 13 adjustments. I want to highlight those that I come across most often in my practice:
- Educator expenses – At the top of the list, the deduction most popular in our household: teachers, as well as public and private school employees, can deduct up to $250 of unreimbursed expenses on classroom supplies. While I know Ben spends way more than that on his classroom, it’s at least a nod to teachers for the money that comes out of their pocket.
- Health savings account deduction – You can make an adjustment for money you contribute to a health savings account (HSA). A HSA allows participants to put money into an account where it grows tax-free and take tax-free withdrawals, if you pay health-care-related costs.
- Moving expenses – You can take an adjustment for expenses incurred when relocating for work-related reasons.
- Self-employment tax – For those self-employed individuals, you can take half of the amount you have to pay on your Social Security and Medicare taxes.
- Self-employed retirement plans – Self-employed individuals can also deduct retirement plan contributions to a qualifying plan, such as a Keogh or a Simplified Employee Pension plan (SEP IRA).
- Self-employed health insurance – Yet another benefit for the self-employed: entrepreneurs can reduce their gross income by the amount paid for health insurance premiums (including long-term care insurance) for themselves, a spouse, and a dependent.
- IRA deduction – Those of you that contribute to an IRA can take a deduction for your contributions.
- Student loan interest – This deduction will likely become the most popular considering all outstanding student loan debt exceeds $1 Trillion. Borrowers can deduct up to $2,500 of the interest you paid on qualified student loans. However, you have some income limitations on this one. For tax year 2014, the amount of the $2,500 you can take decreases when your Modified Adjusted Gross Income (MAGI – which consists of your AGI with some items added back in) hits $65,000 and completely disappears when it hits $80,000 (this limit is $130,000 and $160,000 for those filing Married Filing Jointly).
- Tuition and fees – Qualified higher-education expenses can reduce your taxable income by as much as $4,000.
In addition to the ones I’ve covered, you can take a deduction for expenses like alimony, domestic production activities, and business expenses for reservists, performing artists, and fee based government officials.
Read the return section labeled “Adjusted Gross Income”
As always, take the time to read through the adjustment section to figure out which ones you can take. You might find several ways to reduce your gross income and lower your tax liability in the process.
We have now finished page one of your Form 1040 and will make our way below the line. Two more sections to go and you will have made it through your entire return.