Google
 

Sunday, May 18, 2008

Even if you don't itemize, don't overlook above-the-line tax deductions

By: Sandra Block

Smart consumers are skeptical of offers that sound too good to be true. If those miracle weight-loss products advertised on late-night TV really worked, we'd all look like aerobics instructors, and manufacturers of elastic waistbands would go out of business.

But when it comes to your taxes, you really can reduce your tax bill without breaking a sweat. The secret: above-the-line deductions. These deductions are taken on the first page of your tax return, above the line for your adjusted gross income. Even if you take the standard deduction instead of itemizing, you may qualify for these tax breaks.

Quick guide to tax forms

Itemizers shouldn't overlook these deductions, either. Above-the-line deductions reduce your AGI, which may make you eligible for other tax breaks tied to your income, says Jackie Perlman, senior tax analyst for H&R Block. For example, itemizers can't deduct unreimbursed business expenses unless they exceed 2% of AGI. Shrinking your AGI will increase the chance you'll qualify for that deduction, she says.

To get the full benefit of above-the-line deductions, you have to know what they are. A look at some deductions that could save you money:

Individual retirement accounts. The maximum contribution for an IRA is $3,000 in 2002, or $3,500 if you're age 50 or older. If you're not covered by a retirement plan at work, you can deduct your IRA contribution.

If your company offers a pension or retirement-savings plan, such as a 401(k), you can't deduct the full IRA contribution if your AGI exceeds $34,000 a year if you're single or $54,000 if you're married and file jointly. Singles with AGI up to $44,000 and married couples with AGI of up to $64,000 qualify for a partial deduction.

Don't overlook the spousal IRA. If your spouse isn't working or isn't covered by an employer plan, you can contribute up to $3,000 on your spouse's behalf or up to $3,500 if your spouse is 50 or older. You can deduct the full contribution as long as your combined AGI doesn't exceed $150,000, Perlman says. If your AGI is between $150,000 and $160,000, you may be eligible for a partial deduction.

You have until April 15 to contribute to an IRA for 2002.

Student loan interest. You can deduct up to $2,500 in interest paid on federal student loans. The deduction phases out for single taxpayers with AGI of more than $50,000 or married taxpayers with AGI of more than $100,000. The deduction is available for the full term of the loan, assuming you meet the income thresholds. A rule that limited the deduction to the first 60 months of loan payments was eliminated in 2002.

Higher education expenses. A new above-the-line deduction for 2002 allows taxpayers to deduct up to $3,000 in college tuition and related expenses. Single taxpayers with AGI of up to $65,000 and married taxpayers with income of up to $130,000 qualify. The deduction is a useful tax break for families that earn too much to qualify for the Hope Scholarship or Lifetime Learning Credits.

Classroom expenses. If you're a teacher and spent your own money on books, school supplies, computer equipment and supplementary educational materials, you can deduct up to $250 of your unreimbursed costs.

Alimony. Alimony, including back alimony, is deductible in the year in which it's paid. Property settlements and child support aren't deductible.

Early withdrawal penalties. Did you cash a certificate of deposit before it matured in 2002, triggering an early-withdrawal penalty? You can deduct the lost interest on your tax return. You don't have to itemize, but you must use the longer Form 1040 to take the deduction (see box for guide to tax forms). If you're not sure how much to deduct, check the Form 1099 from your bank, Perlman says. The amount should appear under "forfeited interest."

Taxpayers often mistakenly believe this deduction also extends to penalties triggered by an early withdrawal from an IRA, Perlman says. Unfortunately, those penalties — usually 10% of the amount withdrawn — aren't deductible, she says.

Moving expenses. The cost of a job-related move is an above-the-line deduction, as long as your new job is at least 50 miles farther from your former home as your former job.

Hybrid vehicles. If you bought a hybrid car in 2002, you can take an above-the-line deduction for up to $2,000 of the cost. The IRS says the Toyota Prius, the Honda Insight and a hybrid version of the Honda Civic are eligible for the deduction. The deduction is limited to new cars, and you can take it only for the first year you use the car.

No comments: