Growing Without Rain

News and Views about Taxes

“Can I deduct…?” part 1

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At this time of year, we start getting a steady stream of clients who are worried about owing come April 18. The most common question we get starts out with three little words:
“Can I deduct…??”

There are two different classes of deductions: above the line deductions, which can be taken by any taxpayer who qualifies, and itemized deductions, which can be taken by any taxpayer who chooses to file Schedule A instead of taking the federal standard deduction. There is a third category of tax preferences – tax credits – which are deducted directly from the tax that you owe, rather than being deducted from your income before the tax due is determined, and which can also be taken by any taxpayer who qualifies.

So – what “can you deduct…”? These are above the line deductions, sone of which are well known, some of which are not:

  • Moving expenses. I wrote about this last year, so you can read Part 1, Part 2, Part 3, and Part 4 for details.
  • Educator expenses. If you are an eligible educator (defined as a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year), and you had out-of-pocket expenses for books, supplies, equipment, and other materials used in the class, you can deduct up to $250 of those expenses on line 23 of your 1040. You need proper documentation to substantiate those expenses, and you can’t deduct for anything that would not be considered to be a common expense for an educator.
  • Self-employment. You not only get to deduct half of the self-employment tax that you are required to pay, but you may also get to deduct contributions to a SEP or SIMPLE plan that you establish for yourself, and you may also get to deduct the cost of health insurance that you paid for yourself and you family. You can only deduct these if you have net earnings from self-employment. Check out IRS Publication 560 for details on setting up a retirement plan.
  • If you had a penalty for an early withdrawal of savings from a CD or other savings instrument, you can deduct that penalty on line 30 of form 1040. Your 1099-INT (or 1099-OID if you have one of those) will show the amount of the penalty.
  • If you paid interest on a student loan, and your adjusted gross income was less than $75,000 ($150,000 if married and filing jointly), you can deduct up to $2500 of the interest you paid. You cannot file as married filing separately, and no one else can be claiming you as a dependent. The loan must have been for yourself, your spouse, or your dependent, and must have been for expenses paid during the time in which the individual was enrolled at least half-time in a degree program.
  • If you paid tuition and fees for higher education in 2010, you are not married filing separately or qualify as a dependent of someone else (whether or not that person actually claims you is immaterial), and you cannot take, or choose not to take, an education tax credit for those expenses, you can deduct up to $4000 of those expenses. These expenses must be for you or your spouse or dependent, must be required by an eligible institution as a condition of enrollment, and your adjusted gross income cannot exceed $80,000 ($160,000 if married filing jointly). You must file Form 8917 with your return.
  • If you (or your spouse if married filing jointly) had earned income in 2010, and contributed to a traditional IRA, you may be able to take a deduction for those contributions. Note that this does not include 401(k) contributions or rollovers from another retirement plan. If you are covered by another retirement plan, either through work or as a self-employed individual funding a SEP or SIMPLE plan, your contributions to an IRA may be nondeductable as well. See IRS Publication 590 for details.

    I’ll talk about itemized deductions and credits in later posts.

  • Written by nctaxpro

    March 12, 2011 at 12:51 pm

    One Response

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    1. […] Part 1, I talked about “above the line” deductions – deductions available directly on […]

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