February 18, 2021
Tax Deductions Without Itemizing
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Article Highlights:
Charitable Contributions
Performing Artist Expenses - Some performing artists are allowed to deduct their employment-related expenses as an adjustment to gross income. For taxpayers to qualify for this special rule, all of the following criteria must be met:
State and Local Government Officials’ Expenses – Employee business expenses for a state or local government official are deductible above-the-line if the official is compensated in whole or in part on a fee basis. This provision is intended for officials who provide certain services to the government and who hire employees and incur expenses in connection with their official duties.
Health Savings Account Contributions – Contributions to Health Savings Accounts (HSA) are also an above-the-line deduction. HSAs can only be established by eligible individuals who are covered by high-deductible health plans and generally not covered under any other health plan. There are statutory limits to the amounts that can be contributed to an HSA. Subject to statutory limits, eligible individuals may make contributions to HSAs, and employers as well as other persons (e.g., family members) may contribute on behalf of eligible individuals. An account holder gets a deduction for contributions to their HSA even if someone else (e.g., a family member) makes the contributions. However, since an employer’s contributions to an employee’s HSA are excludable from the employee’s income, the employee can’t also claim a deduction for those contributions.
Amounts in HSAs accumulate tax-free, and distributions are tax-free if used to pay or reimburse qualified medical expenses. Some individuals use HSAs as supplemental retirement plans when they are maxed out on other available tax beneficial retirement plans.
Moving Expenses for Members of the Armed Forces – Although an above-the-line deduction for taxpayers’ moving expenses in general has been suspended until after 2025, deduction of moving expenses is still allowed for members of the armed forces that have to move as a result of a permanent change of station. There are no requirements for distance or length of time at the new station.
Student Loan Interest Deduction – A taxpayer can deduct up to $2,500 above-the-line of interest paid by the taxpayer on a student loan on behalf of the taxpayer, spouse or dependents. The student must be at least half-time. However, the deduction is phased out for higher-income taxpayers. The $2,500 limit applies per year per return, regardless of the number of eligible students or number of loans.
Tuition and Fees Deduction – This above-the-line deduction is allowed for qualified tuition and related expenses for any year only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. The expenses are limited to $2,000 or $4,000 depending upon the taxpayer’s adjusted gross income. For joint returns with an AGI below $130,000, the maximum deduction is $4,000. Between $130,000 and $160,000, the maximum deduction is $2,000, and above $160,000, it is zero. For other filing statuses, the AGI limits are half of those for joint filers, except that married taxpayers using the married separate filing status aren’t eligible for any deduction. The same expenses can’t be used for this deduction and the American Opportunity Credit or the Lifetime Learning Credit, and 2020 is the last year for this deduction.
Deduction for Early Withdrawal of Savings – When someone closes a savings account or CD prematurely, they may get penalized by the financial institution. This is referred to as an interest penalty and is deductible above-the-line. Deductible Part of Self-employment Tax – A self-employed taxpayer can deduct one-half of the self-employment tax computed on Schedule SE for the year.
Self-employed Health Insurance Deduction – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) may be able to deduct 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse and dependents as an above-the-line expense. However, the deduction is limited to the amount of the individual’s net SE income and the individual, spouse or dependent can’t have participated in a health plan subsidized by an employer.
Alimony Payments May Be Deductible – For divorce or separation instruments entered into before 2019 that haven’t been modified to include the tax law change effective for post-2018 instruments, an individual may be able to claim an above-the-line deduction for alimony payments made during the year if certain requirements (not covered in this article) are met. Effective for divorce or separation instruments entered into after 12/31/2018, alimony payments aren’t deductible by the payer and aren’t taxable to the recipient.
Business Pass-through Deduction – As part of the 2018 tax reform, certain businesses are allowed a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies where the business income passes through to the individual’s, partner’s or stockholder’s 1040 income tax return. This category includes income from sole proprietorships, partnerships, S-corporations, rentals, farms, real estate investment trusts (REITs) and pass-through income from publicly traded partnerships. While not an above-the-line deduction because it doesn’t reduce gross income, this pass-through deduction, like the standard and itemized deductions, is subtracted from AGI to figure taxable income.
Retirement Plan Deductions – Contributions to traditional IRAs, self-employed SEPs, SIMPLEs and other qualified retirement plans are above-the-line deductions. However, the deduction for some of these contributions for an employee won’t appear as a line item on the tax return because the tax benefit has already been applied by reducing their taxable wages. The most common example of this treatment is 401(k) plan contributions in which the employee designates a percentage of their wage that is contributed to the plan and their gross wages are reduced by the contribution amount, leaving the balance of the wages as taxable.
If you have questions about how any of these deductions might apply to your tax return, please give this office a call.
- Charitable Contributions
- Educator Expenses
- Performing Artist Expenses
- State and Local Government Officials’ Expenses
- Health Savings Account Contributions
- Moving Expenses for Members of the Armed Forces
- Student Loan Interest Deduction
- Tuition and Fees Deduction
- Deduction for Early Withdrawal of Savings
- Deductible Part of Self-employment Tax
- Self-employed Health Insurance Deduction
- Alimony Deduction (pre-2019 divorce agreements)
- Business Pass-through Deduction
- Retirement Plan Deductions
Charitable Contributions
- For 2020, non-itemizers can deduct up to $300 of cash contributions above-the-line. The $300 limits apply both to single and married taxpayers. Donations to donor-advised funds and private foundations aren’t eligible for the above-the-line deduction (2020 and 2021). The term “above-the-line” is a shorthand way of saying that the deduction reduces gross income when figuring adjusted gross income (AGI). Eligibility for many credits, some other deductions and sometimes the phaseout of the amount of the credit or deduction are based on AGI or modified AGI.
- For 2021, non-itemizers filing a joint return can deduct up to $600 of cash contributions, while taxpayers using the other filing statuses continue to be limited to $300. Unlike the 2020 version of this deduction, which is an above-the-line deduction, the 2021 deduction is claimed after the AGI is determined.
- Books,
- Supplies (other than nonathletic supplies for courses of instruction in health or physical education),
- Computer equipment (including related software and services) and other equipment,
- Supplementary materials used by the eligible educator in the classroom,
- Professional development courses that are beneficial to the students for whom the educator provides instruction, and
- Personal protection equipment (PPE), disinfectant and other supplies used for the prevention of the spread of coronavirus after March 12, 2020.
Performing Artist Expenses - Some performing artists are allowed to deduct their employment-related expenses as an adjustment to gross income. For taxpayers to qualify for this special rule, all of the following criteria must be met:
(1) They must have had two or more employers in the performing arts field during the tax year (don’t count nominal employers who pay less than $200),
(2) Their business expenses must be more than 10% of their gross income earned as a performing artist, and
(3) Their AGI before deducting the performance-related expenses can’t be more than $16,000. Married performers must file joint returns unless they lived apart all year. The two-employer requirement and 10%-of-gross-income requirement are applied to each spouse separately. However, the $16,000-AGI requirement applies to married performers’ joint income.
(2) Their business expenses must be more than 10% of their gross income earned as a performing artist, and
(3) Their AGI before deducting the performance-related expenses can’t be more than $16,000. Married performers must file joint returns unless they lived apart all year. The two-employer requirement and 10%-of-gross-income requirement are applied to each spouse separately. However, the $16,000-AGI requirement applies to married performers’ joint income.
State and Local Government Officials’ Expenses – Employee business expenses for a state or local government official are deductible above-the-line if the official is compensated in whole or in part on a fee basis. This provision is intended for officials who provide certain services to the government and who hire employees and incur expenses in connection with their official duties.
Health Savings Account Contributions – Contributions to Health Savings Accounts (HSA) are also an above-the-line deduction. HSAs can only be established by eligible individuals who are covered by high-deductible health plans and generally not covered under any other health plan. There are statutory limits to the amounts that can be contributed to an HSA. Subject to statutory limits, eligible individuals may make contributions to HSAs, and employers as well as other persons (e.g., family members) may contribute on behalf of eligible individuals. An account holder gets a deduction for contributions to their HSA even if someone else (e.g., a family member) makes the contributions. However, since an employer’s contributions to an employee’s HSA are excludable from the employee’s income, the employee can’t also claim a deduction for those contributions.
Amounts in HSAs accumulate tax-free, and distributions are tax-free if used to pay or reimburse qualified medical expenses. Some individuals use HSAs as supplemental retirement plans when they are maxed out on other available tax beneficial retirement plans.
Moving Expenses for Members of the Armed Forces – Although an above-the-line deduction for taxpayers’ moving expenses in general has been suspended until after 2025, deduction of moving expenses is still allowed for members of the armed forces that have to move as a result of a permanent change of station. There are no requirements for distance or length of time at the new station.
Student Loan Interest Deduction – A taxpayer can deduct up to $2,500 above-the-line of interest paid by the taxpayer on a student loan on behalf of the taxpayer, spouse or dependents. The student must be at least half-time. However, the deduction is phased out for higher-income taxpayers. The $2,500 limit applies per year per return, regardless of the number of eligible students or number of loans.
Tuition and Fees Deduction – This above-the-line deduction is allowed for qualified tuition and related expenses for any year only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. The expenses are limited to $2,000 or $4,000 depending upon the taxpayer’s adjusted gross income. For joint returns with an AGI below $130,000, the maximum deduction is $4,000. Between $130,000 and $160,000, the maximum deduction is $2,000, and above $160,000, it is zero. For other filing statuses, the AGI limits are half of those for joint filers, except that married taxpayers using the married separate filing status aren’t eligible for any deduction. The same expenses can’t be used for this deduction and the American Opportunity Credit or the Lifetime Learning Credit, and 2020 is the last year for this deduction.
Deduction for Early Withdrawal of Savings – When someone closes a savings account or CD prematurely, they may get penalized by the financial institution. This is referred to as an interest penalty and is deductible above-the-line. Deductible Part of Self-employment Tax – A self-employed taxpayer can deduct one-half of the self-employment tax computed on Schedule SE for the year.
Self-employed Health Insurance Deduction – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) may be able to deduct 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse and dependents as an above-the-line expense. However, the deduction is limited to the amount of the individual’s net SE income and the individual, spouse or dependent can’t have participated in a health plan subsidized by an employer.
Alimony Payments May Be Deductible – For divorce or separation instruments entered into before 2019 that haven’t been modified to include the tax law change effective for post-2018 instruments, an individual may be able to claim an above-the-line deduction for alimony payments made during the year if certain requirements (not covered in this article) are met. Effective for divorce or separation instruments entered into after 12/31/2018, alimony payments aren’t deductible by the payer and aren’t taxable to the recipient.
Business Pass-through Deduction – As part of the 2018 tax reform, certain businesses are allowed a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies where the business income passes through to the individual’s, partner’s or stockholder’s 1040 income tax return. This category includes income from sole proprietorships, partnerships, S-corporations, rentals, farms, real estate investment trusts (REITs) and pass-through income from publicly traded partnerships. While not an above-the-line deduction because it doesn’t reduce gross income, this pass-through deduction, like the standard and itemized deductions, is subtracted from AGI to figure taxable income.
Retirement Plan Deductions – Contributions to traditional IRAs, self-employed SEPs, SIMPLEs and other qualified retirement plans are above-the-line deductions. However, the deduction for some of these contributions for an employee won’t appear as a line item on the tax return because the tax benefit has already been applied by reducing their taxable wages. The most common example of this treatment is 401(k) plan contributions in which the employee designates a percentage of their wage that is contributed to the plan and their gross wages are reduced by the contribution amount, leaving the balance of the wages as taxable.
If you have questions about how any of these deductions might apply to your tax return, please give this office a call.
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