10 Ways to Maximize Your Tax Deductions Without Itemizing
Feb 17th 2011 9:00AM
Updated Feb 17th 2011 12:34PM
While it's true that many taxpayers rely on popular itemized deductions, those aren't the only deductions available. Taxpayers who file a form 1040 may also opt to claim a number of what the IRS calls "adjustments to income" -- that's another way of saying non-itemized deductions. Since deductions reduce your taxable income, they're a relatively painless way to chip away at your tax bill. Following are 10 ways to maximize your tax deductions -- without going through the trouble of itemizing:1. Educator Expenses. Teachers (for grades K-12), instructors, counselors, principals or aides who worked in a school for at least 900 hours during the school year in 2010 can take a deduction of up to $250 for qualified expenses (if you and your spouse are filing jointly and both of you were eligible educators, you can claim up to $500). Expenses over the $250 can be taken as an itemized deduction on a Schedule A at line 21. Qualified expenses include those paid in connection with books, supplies, equipment (including computer equipment, software and services) and other materials used in the classroom. Qualified expenses don't include expenses for home schooling or for nonathletic supplies for courses in health or physical education.
2. Alimony. Payments that qualify as alimony can be deducted on your federal income tax return. To qualify, the payments must be "to or for a spouse or former spouse under a divorce or separation instrument." In other words, you must have an official agreement requiring the payment of support in cash or cash equivalent; noncash property settlements or voluntary payments don't qualify. Additionally, payments that can be characterized as child support don't count as alimony payments -- child support payments are tax neutral.
3. Student Loan Interest Deduction. For those of us still paying off those college and graduate school loans, it comes as a bit of a relief to be able to claim interest on a qualified student loan as a deduction. To qualify, you must have paid interest during the year for a student loan used solely to pay qualified higher education expenses; your filing status must not be married filing separately; your modified AGI must be less than $75,000 ($150,000 if married filing jointly); and you and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return. If times were tough and you couldn't make payments during the year so your parents made a payment on your behalf, the IRS may still allow you to deduct up to $2,500 of student loan interest.
4. Student Loan Interest Deduction -- For Someone Else. While it makes sense that you can take a deduction for your own student loan interest, you might not realize you may qualify for a deduction for student loan interest that you paid for someone else. For purposes of the deduction, a qualified student loan is any loan you took out to pay the qualified higher education expenses for not only you and your spouse but for any person who was your dependent when the loan was taken out -- as well as for any person you could have claimed as a dependent for the year the loan was taken out except that the person filed a joint return, the person had gross income equal to or more than the exemption amount for that year ($3,650 for 2010), or you (or your spouse if filing jointly) could be claimed as a dependent on someone else's return. If you qualify, you can deduct the interest even though someone else received the education.
5. Career-Related Moving Expenses. If you moved in 2010 for reasons related to your job or business or to start a new job, you may be able to deduct your moving expenses. Your new workplace must be at least 50 miles farther from your old home than your old workplace was from your old home; if you had no old workplace, your new workplace must be at least 50 miles from your old home. To claim the deduction, you'll need to complete federal form 3903, Moving Expenses.
6. Tuition and Fees Deduction. If you, your spouse or your dependent was a student in 2010, you may be able to deduct tuition and fees paid to an eligible school. An eligible school would include any college, university, vocational school or other post-secondary educational institution that participates in a student aid program administered by the Department of Education. The deduction is based on the amount of qualified education expenses you paid in 2010 for academic periods beginning in 2010 and the first three months of 2011. You cannot take the deduction if your filing status is married filing separately, you were a nonresident at any time during the year, you could be claimed as an exemption by any other person (even if they didn't actually claim you), if your modified AGI is more than $80,000 ($160,000 if filing a joint return) or if you were a nonresident alien for any part of the year. You may be able to take the American Opportunity credit or Lifetime Learning credit for your education expenses instead of the tuition and fees deduction but you may not take both in the same year. To figure your deduction, use federal form 8917, Tuition and Fees Deduction.
7. Health Savings Account Deduction. Health Savings Accounts (HSAs) are tax-favored accounts that allow taxpayers to save for medical expenses. You may be able to take a deduction for those contributions that you make to a HSA during the year; employer contributions, rollovers and qualified HSA funding distributions from an IRA don't count for purposes of a deduction. To be eligible, you must be covered under a high deductible health plan (HDHP) and have no other health coverage except permitted coverage. If you are eligible, anyone can contribute to your HSA. However, you cannot be enrolled in Medicare or be claimed as a dependent on another person's tax return. The maximum amount that can be contributed to your Health Savings Account depends on the type of High Deductible Health Plan (HDHP) coverage you have. For 2010, the maximum contribution for individual plans is $3,050 and the maximum contribution for family plans is $6,150. You'll report contributions and figure your deduction using a federal form 8889, Health Savings Accounts (HSAs).
8. IRA Contributions. Contributions to a traditional IRA may be deductible so long as they meet certain criteria; keep in mind that contributions to a Roth IRA will not be deductible but may still count toward the saver's credit. To qualify, you or your spouse (if filing a joint return) must have earned income during the year. For purposes of determining the IRA deduction, earned income would, in addition to wages and self-employment income, include alimony and nontaxable combat pay; earned income does not include rental income, interest and dividend income, or any amount received as pension or annuity income or as deferred compensation. Additionally, to qualify, you must be under the age of 70 1/2 by the end of 2010. The maximum contribution you can contribute to a traditional IRA is the smaller of $5,000 ($6,000 if age 50 or older) or the amount of your taxable income for 2010, though limits and phaseouts may apply. And unlike many deductions which require you to pay up before the end of the year, you can make an IRA contribution through April 18, 2011, and it will still qualify as a deduction on your 2010 return.
9. Self-Employment Tax Deduction. When you're self-employed, the bad news is that, in addition to federal income tax, you are subject to self-employment (SE) tax. SE tax is a self-employed person's version of payroll taxes: You pay the equivalent of the employee and the employer's contributions to Social Security and Medicare. The good news is that you can deduct one-half of your SE tax paid as a non-itemized deduction.
10. Self-Employed Health Insurance Deduction. Generally, paying out of pocket for health insurance would be considered an itemized deduction that you would claim on a Schedule A. However, self-employed persons who pay for their own plans (as well as for spouses and dependents) may be able to deduct the amounts paid without itemizing. In addition, under provisions in the new small business jobs legislation signed last fall, you can save on payroll taxes due to a move that makes calculating the deduction more advantageous.
These popular non-itemized deductions can dramatically reduce your taxable income, which means you'll pay less in taxes. If you don't itemize, don't automatically reach for the form 1040-EZ; to claim these non-itemized deductions, you'll need to file a form 1040 or, in some cases, a form 1040-A (for more on choosing a tax form, check out this prior article). If you're not sure whether these deductions apply to you, use the "interview style" format found in your tax software or ask your tax professional.