Certain tax deductions on your personal return are more valuable than others. Reason: The write-offs you may be most familiar with, such as deductions for mortgage interest and charitable gifts, are claimed after you have determined your AGI. But other expenses are deducted before the AGI determination is made. These deductions are referred to as “above-the-line” deductions.
Key point: An above-the-line deduction effectively reduces your AGI which, in turn, may qualify you for other tax benefits. Moreover, you can claim above-the-line deductions even if you do not itemize deductions (i.e., you claim the standard deduction).
Here are several common above-the-line deductions available on 2007 returns.
Tuition deduction: If you fall below certain income limits, you can deduct as much as $4,000 of tuition and related fees paid for higher education. The $4,000 deduction is available for single filers with an AGI up to $65,000; $130,000 for joint filers. Otherwise, single filers can claim a $2,000 deduction for an AGI up to $80,000; $160,000 for joint filers. Note: This deduction is currently scheduled to expire after 2007, but it is expected to be revived by Congress.
IRA contributions: You may be able to deduct IRA contributions unless you “actively participate” in an employer-sponsored retirement plan. In that case, deductions for 2007 are phased out for single filers with an AGI between $52,000 and $62,000; $83,000 and $103,000 for joint filers if both spouses are active participants. If only one spouse is an active participant, the deduction is phased out between $156,000 and $166,000 of AGI.
Moving expenses: If you make a job-related move, you can deduct moving expenses under two conditions: (1) The new workplace must be 50 miles farther from your old home than your old workplace was from your old home. (2) You generally must stay at the new job for at least 39 weeks of the next 12 months. Assuming you qualify, you can deduct the cost of transporting household goods and personal effects plus related travel and lodging expenses (but not meals).
Self-employment taxes: If you are a self-employed individual, you may claim several tax types of deductions above-the-line. This includes 50% of the required annual self-employment tax and 100% of health insurance coverage. Similarly, you can deduct your annual contributions to a qualified retirement plan—such as a Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE) or Keogh—within generous limits.
Student loan interest: A taxpayer who is paying off a student loan for higher education may deduct up to $2,500 of the interest on his or her tax return. This deduction is phased out for a single filer with an AGI between $55,000 and $70,000; $110,000 and $140,000 for joint filers. Note: Your child can deduct the interest on any portion of the loan you repay as long as he or she cannot be claimed as your dependent.
This is not a complete list by any means. For more details about above-the-line deductions available on your return, contact a professional tax return preparer.
