Photos from Getty Images.
One of the biggest changes the 2017 tax reform law brought was a near doubling of the standard deduction. It’s up to $12,200 on single returns for 2019 ($12,400 for 2020). Bulking up the standard deduction has let millions of taxpayers avoid the hassle of itemizing write-offs on their tax return because the bigger standard deduction would exceed their qualifying expenses.
But there’s a handful of tax breaks that people taking the standard deduction can still claim to lower their tax bill. Most of these so-called “above-the-line” deductions have no income limits, so anybody can claim them. And in addition to the direct tax savings from these breaks—for taxpayers in the 24% tax bracket, for instance, every $1,000 in above-the-line deductions will lower your tax bill by $240—your lowered AGI could enable you to claim other tax breaks that have income limits.
Some almost everyone should take advantage of. Others are, well, a bit obscure.
In response to the coronavirus crisis, the CARES Act added a new above-the-line deduction to encourage more charitable giving. If you take the standard deduction on your 2020 tax return, you can deduct up to $300 for cash donations to charity you made during the year. Donations to donor advised funds and certain organizations that support charities are not deductible. (The CARES Act also lets itemizers deduct more of their charitable gifts.)
For more ways the CARES Act can boost your financial health, see 11 Ways the Stimulus Package and Other Government Measures Could Help You in 2020.
Individual Retirement Account
Contributing to a traditional individual retirement account (IRA) is a win-win move that lets you boost your retirement savings and trim your tax bill at the same time. The contribution limit is $6,000 ($7,000 if you’re 50 or older) for 2019, and if you don’t have a retirement plan at work (or your spouse does), every dollar of that can be knocked off your income. If you’re covered by a retirement plan at the office (or your spouse is) then that deduction might be limited by your income on your 2019 return.
You may make 2019 IRA contributions up until April 15, 2020.
Note that, for 2020, the contribution limits remain the same, but the income limits for the deduction are slightly higher.
Health Savings Account
Are you funding a health savings account (HSA) in conjunction with a high-deductible health plan (HDHP)? Smart move.
You get an above-the-line deduction for contributions to the HSA, assuming you made them with after-tax money. If you contributed pretax funds through payroll deduction on the job, there’s no double-dipping—so no write off. In either case, you need to file a Form 8889 with your return. The maximum contribution for 2019 is $7,000 for family coverage and $3,500 if you’re an individual (they are slightly higher for 2020). If you’re 55 or over at any time in the year, you can contribute (and deduct) another $1,000.
If you work for yourself, you have to pay both the employer and the employee share of Social Security and Medicare taxes—a whopping 15.3% of net self-employment income. But at least you get to write off half of what you pay as an adjustment to income. You can also deduct contributions to a self-directed retirement plan such as a SEP or SIMPLE plan (and those can cut big chunks off your income).
Also deductible as an adjustment to income: the cost of health insurance for the self-employed (and their families)—including Medicare premiums and supplemental Medicare (Medigap), up to your business’ net income. You can’t claim this deduction if you are eligible to be covered under a health plan subsidized either by your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).
If you paid college tuition for yourself, your spouse or a dependent in 2019, you may be able to deduct up to $4,000 in college tuition and fees. To qualify for the full deduction, your adjusted gross income must be $130,000 or less if married filing jointly ($65,000 or less if single). You can deduct up to $2,000 in tuition and fees if your joint income was $160,000 or less ($80,000 or less if single). There is no deduction if you earn more than that. (This deduction expired at the end of 2017; however, it was retroactively extended through 2020 in December 2019. You can file an amended return to claim it for the 2018 tax year.)
In addition, up to $2,500 in student-loan interest (for you, your spouse or a dependent) can be tax-deductible on 2019 returns if your modified adjusted gross income is less than $70,000 if you’re single or $140,000 if you are married and file a joint return. The deduction is phased out above those levels, disappearing completely if you earn more than $85,000 if single or $170,000 if filing a joint return.
Tax reform did away with almost all employee deductions that were taken on Schedule A by itemizers. But in certain lines of work, under certain conditions, you can still knock off some of your costs. Here are those adjustments to income, which are now found on Schedule 1:
- You’re a schoolteacher and you buy supplies for your classroom. The Educator Expense Deduction lets educators write off up to $250 each year of such expenses if they teach kindergarten through 12th grade and put in at least 900 hours a year on the job. You don’t have to be a teacher to claim this break. Aides, counselors and principals may claim it if they have the receipts to back it up. But home schoolers are out of luck.
- You’re in the National Guard or military reserves and you travel to drills. You must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and meals (following the federal per diem schedule) plus an allowance for driving your own car. For 2019 travel, the rate is 58 cents a mile, plus what you paid for parking, fees and tolls. For 2020, it’s 57.5 cents.
- You’re a performing artist making less than $16,000 (sorry Beyoncé, not for you). The IRS will expect you to show that at least two employers paid you $200 each for your services and that the expenses you intend to deduct are more than 10% of what you made from performing. Note that the IRS specifies that you need to be an employee receiving wage income.
- You’re disabled, have a job, and incur expenses that allow you to work. Here’s an example from the IRS: You’re deaf and use a sign-language interpreter during meetings while you are at work—that’s deductible here.
- You’re a “fee-based public official” and want to write off job expenses. This does not mean people employed by any government. Rather, it’s for individuals such as notary publics who perform a public function and are paid directly by the people they serve. If you meet that definition, you can deduct your work-related expenses (ink pads?).
Early Withdrawal Penalties
Did you break into a certificate of deposit (CD) early and get slapped by a bank penalty? Bank penalties can vary widely, but one thing is constant: You can deduct the penalty, no matter how lenient or how stiff, as an adjustment to income. A Form 1099-INT or Form 1099-OID from the bank will show the amount of any penalty you paid.
Moving Expenses When You Change Jobs (If You're a Service Member)
The new tax law killed this break, but with one significant exception: If you’re in the armed forces, the cost of any move associated with a permanent change of station still qualifies. You can deduct the unreimbursed costs of getting yourself and your household goods to the new location. If you drove your own car for a move in 2019, deduct 20 cents a mile plus what you paid for parking and tolls (17 cents per mile for 2020). (Use Form 3903 to tally your moving deductions.)
You may be able to deduct alimony you pay to a former spouse as long as your divorce agreement was in place before the end of 2018 and the monetary payments are spelled out in the agreement. The deduction disappears if the agreement is changed after 2018 to exclude the alimony from your former spouse’s income. You must also report your ex-spouse’s Social Security number, so the IRS can make sure he or she reports the same amount as taxable income. (Child support, however, is not deductible.)
David Muhlbaum is a Senior Online Editor at Kiplinger.