As a taxpayer, you have two options for claiming deductions: Take the IRS' "standard deduction" ($6,100 for single filers' 2013 returns and double that for joint filers, and even more for folks 65 and older) or itemize your deductions if doing so gives you a bigger writeoff. Most taxpayers take the standard deduction because, for them, itemizing is both more hassle and less valuable. But there's a handful of tax breaks that people taking the standard deduction can still claim to lower their tax bills. The IRS calls these "adjustments to income," but another term is above-the-line deductions, because they show up on the 1040 form above your adjusted gross income (and you get to subtract them from your total income.) A few of the adjustments are available if you use the short-form 1040A, but, for most, you need to use the 1040.
See Also: The Most Overlooked Tax Deductions
Most of these above-the-line deductions have no income limits, so anybody can claim them. And in addition to the direct tax savings from these breaks—for taxpayers in the 25% tax bracket, for instance, every $1,000 in above-the-line deductions will lower your tax bill by $250—your lowered AGI could enable you to claim other tax breaks that have income limits.
Even high earners facing the dreaded alternative minimum tax (designed to prevent the wealthy from using so many tax breaks that their tax bill is reduced to little or nothing) can benefit from these deductions, unlike some potential breaks, such as home equity interest, that lose all value for itemizers who fall into the AMT.
Let's go through them line by line to help you find savings:
Educator Expenses
Teachers often kick in more than just extra time—they end up buying school supplies themselves, especially in underfunded districts. An off-again, on-again above-the-line deduction lets educators write off up to $250 each year of such expenses if they teach kindergarten through 12th grade and put in at least 900 hours a year on the job. You don't have to be a teacher to claim this break; aides, counselors and principals may claim it if they have the receipts to back it up. But home schoolers are out of luck. The deduction expired at the end of 2013, but we expect Congress to reinstate it retroactively for 2014.
Employee Business Expenses
Most employee deductions are claimed on Schedule A by itemizers, but only to the extent that their miscellaneous expenses exceed 2% of their adjusted gross income. But in certain lines of work, under certain conditions, you can knock off some of your costs above the line. Here are those niches:
You're in the Army Reserve and you travel to drills. You must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car. For 2013 travel, the rate is 56.5 cents a mile, plus what you paid for parking fees and tolls.
You're a performing artist making less than $16,000 (sorry, Kanye, you don't qualify). The IRS will expect you to show that at least two employers paid you $200 each for your services and that the expenses you intend to deduct are more than 10% of what you made from performing.
You're disabled, have a job, and incur expenses that allow you to work. Here's an example from the IRS: You're deaf and use a sign-language interpreter during meetings while you are at work—that's deductible here.
You're a fee-based public official. As an example, the IRS cites building inspectors who earn fees directly from property owners.
Health Savings Account Deduction
Are you funding a health savings account (HSA) in conjunction with a high-deductible health plan (HDHP)? Smart move.
You get an above-the-line deduction for contributions to the HSA, assuming you made them with after-tax money. If you contributed pretax funds through payroll deduction on the job, there's no double-dipping—so no write off. In either case, you need to file a Form 8889 with your return.
Moving Expenses When You Change Jobs
If your new job is at least 50 miles farther away from your old home than your old job was, you may take this break. (If you're in the armed forces, the cost of any move associated with a permanent change of station can qualify.) If you qualify, you may deduct the cost of getting yourself and your household goods to the new area. If you drove your own car for a move in 2013, deduct 24 cents a mile plus what you paid for parking and tolls. (Use Form 3903 to tally your moving deductions.)
Deductions for the Self-Employed
If you're self-employed, you know you have to pay both the employer and the employee share of Social Security and Medicare taxes—a whopping 15.3% of net self-employment income. But at least you get to write off half of what you pay as an adjustment to income. You can also deduct contributions to a self-directed retirement plan such as a SEP or SIMPLE plan. (See Ask Kim: Best Ways for the Self-Employed to Save for Retirement for details on contribution limits and contribution deadlines.)
Also deductible as an adjustment to income: the cost of health insurance for the self-employed (and their families)—and that includes Medicare premiums and supplemental Medicare (medigap). You can't claim this deduction if you are eligible to be covered under a health plan subsidized either by your employer (if you have a job as well as your business) or your spouse's employer (if he or she has a job that offers family medical coverage).
Early-Withdrawal Penalties
Did you break into a certificate of deposit (CD) early and get slapped by a bank penalty? Bank penalties can vary widely, but one thing is constant: You can deduct the penalty, no matter how lenient or how stiff, as an adjustment to income. A Form 1099-INT or Form 1099-OID from the bank will show the amount of any penalty you paid.
Alimony
You can deduct alimony you pay to a former spouse as long as the monetary payments are spelled out in your divorce agreement. You must report your ex-spouse's Social Security number, so the IRS can make sure he or she reports the same amount as taxable income. (Child support, however, is not deductible.)
Retirement Contributions
This is where you get to deduct contributions to a traditional IRA—a win-win move that lets you boost your retirement savings and trim your tax bill at the same time. The contribution limit is $5,500 ($6,500 if you're 50 or older) for 2013, and the deduction fades away above certain income levels. You may make 2013 IRA contributions up until April 15, 2014.
Educational Costs
Up to $2,500 in student-loan interest (for you, your spouse or a dependent) can be tax-deductible on 2013 returns if your modified adjusted gross income is less than $60,000 if you're single or $125,000 if you are married and file a joint return. The deduction is phased out above those levels, disappearing completely if you earn more than $75,000 if single or $155,000 if filing a joint return.
There's also a potential deduction here for tuition and fees—up to $4,000. (The tuition deduction expired at the end of 2013, but may be extended retroactively for 2014.) Again, there are income limits: You can't take it if your modified adjusted gross income is more than $80,000 if you're single or $160,000 if you are married and file a joint return. But first make sure you shouldn't be claiming the American Opportunity credit ($2,500 for each of your first four years in college) or Lifetime Learning credit (up to 20% of the first $10,000 in tuition) instead. These tax credits are more powerful than deductions, as they reduce your tax bill dollar for dollar.
Domestic Production Activities
Are you making something in the USA? That's what this deduction of up to 9% of the income you get from your "activities" is all about. It's not just for pumping oil and gas out of the ground, farming or making widgets—making music or software can qualify. The deduction traces its origins to an effort by Congress to boost exports by encouraging domestic production. It can be a complex deduction to claim but one that all business owners should take a look at—with their accountants.
Jury Pay Handed Over to Your Employer
Many employers continue to pay employees' full salary while they serve on jury duty, and some impose a quid pro quo: The employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. (See 9 Surprising Things That Are Taxable.) To even things out, you get to deduct the amount you give to your employer.
But how do you do it? There's no line on the Form 1040 labeled "jury fees." Instead, the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Add your jury fees to the total of your other write-offs and write "jury pay" on the dotted line.
Did you get a taxable reward for turning a tax cheat into the IRS? If so, this is also the line to deduct any attorney and court fees you paid in association with your good deed. And if you won a taxable award in an employment-discrimination lawsuit, write off your legal fees here.
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