If you don't itemize, don't fret: Uncle Sam has tax
breaks for you
Single man looking for tax breaks. One child. Only debt is college
loan. Good IRA. No itemizing, please.
If the Internal Revenue Service ran a personals
service, it probably would get a lot of ads like this. There's a
lot of hoopla, especially in tax filing season, about the deductibility
of this and the deductibility of that.
But deductions are only good if you itemize,
and most Americans don't. Instead, the majority of filers use the
So what's a guy like the one in the ad to do
when it comes to finding ways to cut his tax bill? Plenty.
If he paid alimony, contributed to a self-employed
pension plan, paid student loan interest or had moving costs, they
can help reduce his tax bill. Then there are various tax credits,
which, if he qualifies, can chop his tax bill even more without
a Schedule A anywhere in sight.
price of convenience
In the tax world, simplicity has a price.
Folks who have uncomplicated tax lives tend
to use Form
1040EZ. But they could be cheating themselves.
The EZ's appeal is that it's short and to the
point. No fuss, no muss, but only one tax break. Even that -- the
Income Credit -- is not available if you make a good living.
For more tax breaks, consider filing a more
detailed return. It may take a bit longer, but Form
1040A provides a dozen possible chances to reduce taxes. And
you get more than double that number of tax-saving opportunities
with the longer Form
Both of the longer returns offer adjustments
to income, sometimes called above-the-line
deductions because they are reported just before the line on
each form where you tally your adjusted gross income. Like the classic
Schedule A deductions, they reduce taxable income. Less income equals
less tax. The only downside is that some adjustments require completion
of another form or worksheet.
These longer returns also provide more tax credits
that, like deductions, can help reduce what you owe. The added beauty
of credits is that they slice your tax bill after you've already
figured what you owe.
The easiest way to reduce tax bills is to reduce income. Rather
than turning down your next raise, try taking some of the income
adjustments the IRS offers to filers of 1040A or 1040 forms.
If you're a teacher, don't skip the first income
adjustment opportunity. The educator
expenses deduction should let you use some of the money you
spent on classroom materials to directly trim your taxable income.
And it's not restricted to teachers; counselors, principals, aides
and instructors at public or private elementary and secondary schools
also can claim up to $250 they paid out of their own pockets for
The amount is relatively small, but more taxpayers
should be able to claim at least a portion of their school-related
expenditures. In the past, educators could claim such costs only
if they included them as miscellaneous itemized deductions on Schedule
A. Even then, they couldn't be used unless all a filer's allowable
sundry costs totaled at least 2 percent of adjusted gross income.
Next is the adjustment for traditional
IRA contributions. Any retirement money you put away must follow
the usual deductibility guidelines. For example, the limit is $3,000
and a portion of your deduction may be limited if you're covered
by a pension plan at work.
If you are paying off a school loan, don't skip
the next line. Here you can subtract up to $2,500 of interest paid
on a "qualified" student loan. A loan qualifies in the
IRS' eyes if the money pays for your higher education expenses or
those of your spouse or a person who was your dependent when the
loan was obtained. And former students paying off longer-term loans
no longer have to worry about the 60-month limit on interest payments.
Another education-related income adjustment,
and fees deduction, could reduce your taxable income by up to
$3,000. As with the student loan deduction, you qualify if you pay
IRS-accepted higher education expenses for yourself, your spouse
or a dependent. The deduction is not available, however, if you
make more than $65,000 or if you use claim the Hope or Lifetime
Learning tax credits. And if you used money from a state tuition
plan, a Coverdell educational savings account or interest on savings
bonds you cashed to pay for class, you have to subtract those amounts
from your expenses to arrive at the allowable tuition and fees deductible
Instruction books for both forms -- Form
1040 instructions and Form
1040A instructions -- provide detailed eligibility guidelines
as well as worksheets for these adjustments to help you determine
if they can help your specific tax situation.
This is the end of the line for adjustments found on Form 1040A.
But with the 1040, the income adjustment list keeps going.
You can subtract moving expenses that meet requirements
detailed on Form
If you're self-employed, you get several income
- Half of self-employment taxes. Use Schedule
SE to figure the amount.
- 100 percent of any health insurance premiums,
including amounts for family coverage.
- Contributions to self-employment pension
plans, like Keoghs, SIMPLEs or SEPs.
Did you cash in a certificate of deposit and
pay an early withdrawal penalty? The IRS lets you subtract that
And divorced filers get a chance to recoup alimony
payments. Be sure to include the Social Security number of your
ex-spouse. The IRS wants to make sure he or she reports the payments
as income, and if the recipient's tax ID number isn't on your return,
the adjustment could be disallowed.
There also are several other specific deductions
-- such as contributions to an Archer medical savings account, performing
arts expenses, jury duty pay given to your employer, and the increasingly
popular deduction for the purchase of a clean-fuel
vehicle -- available to some 1040 filers. Details on what they
are and who is eligible can be found in the Form 1040 instructions.
These adjustments, when subtracted from total
income, can dramatically reduce a taxpayer's total income, resulting
in what is known as adjusted gross income. When you use this lower
AGI, your taxable income -- what you get after next subtracting
your exemption and standard deduction amounts -- will be less, as
will your eventual tax bill.
But don't stop. Now it's credit time.
credits to get to zero tax
While the long 1040 is the clear winner in the income adjustment
sweepstakes, the 1040A offers more competition in the credits contest.
Credits cut your bill directly, dollar-for-dollar,
because they are subtracted from the actual tax you owe. Both of
the longer 1040 forms allow eligible taxpayers to take:
- Child and dependent care credit helps pay
the caretaker costs for children or older dependents so that the
taxpayer can work. Filing guidelines are in Form
2441 instructions for 1040 filers, Schedule
2 for 1040A users.
- Elderly or disabled credit is available to
older taxpayers or those receiving disability payments. Eligibly
details are in Schedule
tax credit means your first two eligible children are worth
a $1,000 credit each.
credits let you recover some of your schooling costs. Form
8863 has details on the Hope credit for expenses during the
first two years of college and the Lifetime Learning credit for
courses after that. You might be able to get $1,500 for the Hope
and $2,000 for Lifetime expenses. But be careful: You can't use
both credits for the same student expenses.
credit helps cover some costs of adopting if the requirements
outlined in the instructions for Form
8839 are met.
- The retirement
savings contributions credit, designed to encourage lower-wage
earners to save more. With this credit, eligible taxpayers could
reduce their tax bills by as much as $1,000. The exact credit
depends upon how much a worker adds to an IRA (traditional or
Roth) or to a retirement plan.
Since these credits are subtracted
from the amount of tax you owe, they can take your tax bill down
to zero if you have enough credits. But that's as far as they go,
and as such are called nonrefundable credits.
Other, more specific, nonrefundable credits
provide the slim margin of victory for Form 1040 in the credit contest.
It's only on the longer form that a taxpayer
can get credit for foreign
income taxes paid. These generally are in connection with stocks
or other investment accounts, and might require completion of Form
There also are several other specific credits
-- such as ones for electric vehicle owners, first-time homeowners
in Washington, D.C., and state or local mortgage credits -- available
to some 1040 filers. Again, details on who is eligible for these
can be found in the Form 1040 instructions.
Two tax credits are refundable. They can get you cash back from
the IRS if you don't owe any tax or increase any refund you have
coming. They are:
child tax credit: Taxpayers who support only one or two children
but who don't earn much money may be able to get a bigger tax
break thanks to this credit. To file for it, fill out Form
income credit: This is the only credit also available to 1040EZ
filers and it can be a great benefit for workers who don't make
much money. This tax break returns to qualified individuals a
portion of the taxes they paid. It even can produce a tax refund
for eligible filers who had no tax liability. The credit is larger
low-income taxpayers supporting children, but even childless filers
might be eligible for a credit here. Check IRS worksheets in the
1040 and 1040A instruction books to determine eligibility and
credit amounts. If you qualify, you must file Schedule
is tax money -- saved or lost
All these adjustments and credits are available to any eligible
taxpayer, regardless of whether they take the standard deduction
or itemize. Because those who itemize deductions are already in
the form-filing mode, they tend to pay more attention to these tax-saving
Many taxpayers accustomed to Form 1040EZ often
complain about the time it takes to complete the extra forms and
worksheets. But if you don't itemize, these forms offer you the
best chance to cut your tax bill. A bit more time could mean added
money to you, instead of to Uncle Sam.
The savings may even be big enough to let you
hire someone to fill out all paperwork and still end up with extra
cash this tax season!