Important Tax Deductions

Mar 12, 2014

Taxpayers like deductions because they’re a key to lowering taxes. But not all deductions work the same way in the tax calculation. Those you are allowed to claim “above the line” can be especially powerful.

On your personal tax return, above-the-line deductions are subtracted from your income to arrive at your adjusted gross income, or AGI. AGI is a critical figure used to determine whether you’re entitled to various tax breaks. For purposes of qualifying for tax benefits, you want to keep your AGI as low as possible. Above-the-line deductions help you do that.

So which expenses are deductible above the line? Here are some of the more common ones.

Rental property/trade or business expenses. Owners of rental properties may deduct various expenses — utilities, repairs and maintenance, depreciation, etc. — above the line on Schedule E. Sole proprietors deduct their trade or business expenses above the line on Schedule C.

Health savings account (HSA) contributions. The maximum deductible HSA contribution for 2014 is generally $3,300 for individuals with self-only coverage under a high-deductible health plan and $6,550 for those with family coverage. Individuals age 55 or older who aren’t enrolled in Medicare may contribute an additional $1,000.

Moving expenses. Costs associated with moving household goods and personal effects to a new residence and traveling from an old to new residence are potentially deductible if the move is because of a change in principal work location. Certain other requirements must be met.

For the self-employed. Retirement plan contributions, qualified health insurance premiums, and a portion of self-employment taxes are deductible above the line. Requirements and limits apply.

Penalty on early withdrawal of savings. The deduction is for any interest or principal forfeited to a bank or other financial institution as a penalty for premature withdrawal from a time savings account, certificate of deposit, or similar deposit.

Alimony. To be deductible, payments must be made in cash pursuant to a divorce or separation instrument. They can’t be required to continue beyond the recipient’s death or be fixed as child support.

Individual retirement account (IRA) contributions. Your contribution of up to $5,500 ($6,500 if you’re at least age 50) to a traditional (non-Roth) IRA may be deductible. In an interesting twist, your ability to make a deductible IRA contribution will depend on your pre-IRA-deduction AGI if you or your spouse actively participates in an employer-sponsored retirement plan. The rules are a little complicated, so talk to us first if you’re interested in an IRA contribution.

Student loan interest. Up to $2,500 of annual interest paid on qualified higher education loans is potentially deductible. This deduction is also subject to income limits. For 2014, the deduction phases out for taxpayers with modified AGI between $130,000 and $160,000 (joint filers) or between $65,000 and $80,000 (single filers).

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