When it comes to federal income taxes, your focus needs to be to pay only what is necessary, nothing more. Because your tax liability is calculated by your net income, the best way to reduce the taxes you pay is to minimize your income. Of course, you need to do this without technically reducing your income. You can do this by taking legal above-the-line tax deductions.
Above-the-line-tax deductions are basically like tax deductions that are adjustments to your income. They’re labeled above-the-line because they are claimed on the first page of the tax return just above the last line. These deductions reduce your adjustable gross income and effectively decrease your tax liability.
The list below are a few above-the-line tax deductions that are discussed in our Domain Tax Guide which you should consider if you are eligible.
• Moving expenses, if you relocated for employment purposes.
• Self-employment. Half the total of taxes that are calculated to Social Security and Medicare.
• Self-employed retirement plans.
• Self-employed health insurance. The total amount you fund in health insurance fees not only for yourself, but for your spouse and dependents as well. Even contributions towards long-term care policies are included.
• Penalties paid for early withdrawal of savings. The account manager of such an account should send you a 1099-INT or 1099-OID form including the early withdrawal penalty.
• Alimony payments. If you became divorced and funding alimony, you can deduct these payments from your income. You must include your ex-spouse’s social security number; or the deduction might be disallowed.
• IRA deductions for amounts contributed to traditional IRAs for people who are self-employed.
• Student loan interest. Up to $2,500 in student loan interest paid can be deducted for single filers making $65,000 or less or joint filers making $135,000 or less.
• Jury duty pay if it was turned over to your employer.
Individuals can utilize many of these above-the-line tax deductions by using the long form, 1040. If you prefer to use the short from, 1040A, you can still take a few of these deductions. Early account withdrawal penalties, IRA contributions, student loan interest and jury pay are a few of the above-the-line-tax deductions that are allowed on the 1040A tax return. Consult with your personal tax consultant for more details or check out this Review of Domain Tax Guides.
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