More On Tax Planningfrom The Advisor's Professional Library
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- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
Deciding whether to itemize or take the standard deduction became somewhat easier for the 2010 tax year when standard deductions for disaster losses, real estate taxes and new motor vehicle taxes and the Schedule L used to calculate them were largely eliminated for 2010, according to a statement issued Thursday by CCH.
For 2010, the standard deduction is $5,700 for single filers ($11,400 for joint filers). Taxpayers who have expenses that exceed that amount related to unreimbursed employee expenses, tax preparation fees and other expenses such as certain taxes, interest, personal casualty and theft losses, and medical expenses, may want to determine whether itemizing will save them more money, CCH said.
Regardless of whether taxpayers take the standard deduction or itemize, they can take above-the-line deductions. “Assuming you qualify, above-the-line deductions are easy ways to substantially lower your taxes,” CCH principal federal tax analyst Mark Luscombe said in the statement.
CCH cautioned, however, that because not all deductions are available on all forms, taxpayers need to be certain they are completing the form that allows them to claim the deductions to which they are entitled. For example, taxpayers claiming an IRA deduction or deductions for three education-related expenses can use either Form 1040 or 1040A. However, taxpayers looking to claim several other above-the-line deductions, including those for Health Savings Accounts or for the self-employed, can do so only on Form 1040.
In its statement, CCH outlined 10 common above-the-line deductions and the forms on which they are available. Each of the following deductions can be claimed on either Form 1040 or 1040A:
IRA deductions. The maximum deduction for an IRA is $5,000 for 2010 or $6,000 for individuals 50 and older making a catch-up contribution. For 2010, the deduction begins to phase out at adjusted gross income (AGI) levels above $56,000 ($89,000 for joint filers), and is not available to taxpayers with AGI above $66,000 ($109,000).
Student loan interest.The 2010 Tax Relief Act extended the above-the-line deduction for student loan interest up to $2,500 annually through 2012. For 2010, the deduction
begins to phase out at AGI levels above $60,000 ($120,000), and is not available to taxpayers with AGI above $75,000 ($150,000).
Tuition and fees. Filers can deduct tuition and fees of up to $4,000 subject to reduction at AGI levels above $65,000 ($130,000); this deduction is not available if AGI exceeds $80,000 ($160,000). This deduction, extended through 2011 as part of the 2010 Tax Relief Act, must be coordinated with other educational exclusions and cannot be used if claiming the American Opportunity Tax Credit or Lifetime Learning Credit for the same student.
Educator expenses. Also extended through 2011 is a deduction available to eligible educators up to $250 per year for unreimbursed expenses incurred in connection with books, supplies (other than nonathletic supplies for courses in health or physical education), computer equipment and supplementary materials used in the classroom.
The deductions below are available only to taxpayers using Form 1040:
Expenses for reservists, performing artists and fee-basis government officials.Normally, expenses related to an occupation are taken as itemized deductions or are subtracted from income on a business return, but exceptions exist for these narrow classes. Details are available on Form 2106.
Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs).The deduction for HSAs is taken on line 25. As with IRA contributions, contributions to 2010 HSAs can be made until the April 18, 2011 tax return deadline. Taxpayers with an MSA must indicate the deduction by writing in “MSA” and the amount on the dotted line next to line 36.
Moving expenses related to a new job.To qualify for this deduction, the taxpayer’s new workplace must be at least 50 miles farther from his or her old home than was the previous workplace.
Deductions for the self-employed.One-half of self-employment taxes are deductible. The self-employed also can deduct health insurance premiums and contributions to Keogh, SEP and SIMPLE retirement plans from their gross income.
Early withdrawal penalties.Taxpayers who earned interest that they later forfeited because of a premature withdrawal penalty can use the loss to reduce their gross income.
Alimony.Alimony, including back alimony, is deductible in the year when it is actually paid. Property settlements and child support are normally nondeductible.