Frequently, taxpayers pay close attention to itemized deductions, but forget about “above-the-line” deductions that could be even more valuable. These deductions reduce your adjusted gross income (AGI) for various tax purposes. Following is a list of ten key items available on 2020 returns.
- Charitable donations: Usually, charitable deductions are limited to itemizers. However, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, non-itemizers can claim a deduction of up to $300 for monetary contributions made in 2020. Note: The Consolidated Appropriations Act (CAA) passed late last year extends this tax break through 2021.
- IRA contributions: For 2020, you can contribute up to $6,000 to a traditional IRA ($7,000 if you are age 50 or over). Depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) actively participate in a qualified retirement plan, contributions may be wholly or partially deductible.
- Tuition and fees: In lieu of claiming a higher education credit, you may deduct either $4,000 or $2,000 of the qualified tuition and fees you paid in 2020. This deduction is phased out based on MAGI. Note: The tuition-and-fees deduction, which was scheduled to expire after 2020, was repealed by the CAA.
- Student loan interest: The tax law allows you to deduct up to $2,500 of student loan interest if you are legally obligated to repay the debt. However, this deduction is also phased out based on MAGI for 2020.
- Alimony: The deduction for alimony has been repealed for divorce and separation agreements executed after 2018. Nevertheless, the alimony deduction is still available for most payments pursuant to pre-2019 agreements, even if they have subsequently been modified.
- Health Savings Accounts: With a Health Savings Account (HSA), you can contribute to an account set up to pay qualified medical expenses in conjunction with a high-deductible health insurance plan. The HSA contributions are deductible up to generous limits based on individual or family coverage.
- Self -employment tax: If you are self-employed, you must pay self-employment tax at twice the combined Social Security and Medicare tax rates for employees. Thus, the rate is 15.3% instead of 7.65%. On the flip side, the tax law permits self-employed individuals to deduct half of their self-employment tax payments.
- Self-employed retirement plans: Frequently, self-employed individuals will set up and fund a qualified retirement plan—for example, a SEP, SIMPLE or solo 401(k)—for themselves. Contributions to the plans are deductible within generous limits on your 2020 tax return.
- Self-employed health insurance: Self-employed individuals may deduct100% of qualified health insurance premiums they pay for themselves, their spouse and dependents. This tax break includes dental and long-term care insurance (LTCI) coverage (subject to certain limits) as well as traditional health insurance.
- Early withdrawal penalty: If you withdraw money from a Certificate of Deposit (CD) or other time-deposit savings account before maturity, you generally have to pay an early withdrawal penalty. On the bright side, you can salvage a tax deduction for any penalties.
Caution: This list is by no means all-inclusive. For instance, other tax deductions are available to groups ranging from educators to military reservists to those in the performing arts. Consult with your JMF tax professional regarding your situation.