Cut Your Tax Bill Now With 5 Big Deductions
This defies the conventional wisdom, but some tax preparation is easy and actually makes sense — if anything can in the murky U.S. tax code.
Some of my favorite write-offs are “above the line.” That means they are relatively simple to declare and you can put them right on the first page of your 1040 tax form.
While most of the tax code is maddening — just try to figure out your alternative minimum tax liability without software or a tax planner — there are certain deductions that often fly under the radar. If you have a small business, for example, did you know that one-half of self-employment taxes are deductible?
Some write-offs are more obscure. Do you qualify for “certain expenses of reservists, performing artists and fee-basis government officials?” You’ll need to file forms 2106 or 2106-EZ.
Even unpleasant expenses such as alimony and early-withdrawal penalties from savings accounts can be written off, according to CCH, the tax-information service.
As with anything to do with U.S. taxes, however, there are limits as to how much you can deduct and which items qualify. Here are some of the trickier yet useful above-the-line items:
* Education expenses. You can write off up to $2,500 a year in student-loan interest depending on your income. But if you make more than $75,000 (as a single) or $150,000 if filing jointly, you lose the deduction. College tuition and fees are also deductible, yet the IRS limits this write-off to singles making less than $80,000 or $160,000 for joint filers. Note: If you qualify, you can write off all educational expenses except for textbooks.
* IRA deductions. I’ve always been perplexed as to why the government bothers to limit write-offs for savings. To me, all savings is good and should be tax-deductible. Nevertheless, the maximum IRA write-off for 2010 is $5,000 — $6,000 if over 50 years of age. The deduction is not available to singles with adjusted income of more than $66,000 or $109,000 for joint filers.
* Employee business expenses. The IRS has been picky about this category in recent years. In general, you can only write off 80% of your meals away from home on business. Lodging, airplane fares, parking, tolls and other transportation expenses for business trips are fully deductible, however. The IRS will allow 50 cents per mile for business-related travel. That’s not much given how much gasoline prices have soared, but it adds up when you tack on vehicle expenses.
* Health savings accounts. If you fund an HSA, then you can write off the entire amount on line 25, Form 1040. While this won’t do anything to lower your out-of-pocket health costs, it will certainly lower your tax liability — especially if you carry a high deductible. Keep in mind that you can contribute to a 2010 HSA until April 18 of this year, so there’s still time.
* Miscellaneous deductions. It always surprises me what the IRS allows for these write-offs. The big catch — a perennial bugaboo in tax land — is that these deductions can’t exceed 2% of your adjusted gross income. Here’s a short list from Publication 529: business liability insurance premiums; un-reimbursed educator expenses ($250 maximum); work clothes and uniforms; passports required for business trips; business licenses and regulatory fees; subscriptions to professional journals required by your employer; and job-search expenses.As is the case in most years, the tax code changes slightly every year. Keep in mind that you can no longer deduct disaster losses and new motor vehicle excise taxes on your 2010 return.
Of course, tax preparation could be made much simpler if most, if not all, deductions were replaced with a higher standard deduction, which is $5,700 for singles and $11,400 for joint filers for 2010. Congress and the White House have been considering something like that for years. Maybe this year it will actually happen.