Save On Your Taxes Part 1: Above the Line Adjustments

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Tax Saving Piggybank

Paying taxes is just a fact of life. Make some money, give a cut of that back. My good friend, Tony, just came back north for the season. He and I were catching up the other day and I was complaining about how much I owed in taxes when I filed. He told me a few things he does to lower his tax bill. They were, ummm, let’s say creative interpretations of what’s allowed. I would not call them strictly legal so I’m not going to pass them along. But the conversation did get me thinking. What can I do (legally) to lower my tax burden?

The tax code has a slew of things that can help you minimize how much you pay. There are two major categories that you’ll focus on to legally decrease your tax burden: decreasing your adjusted gross income and increasing your tax credits. We’ll focus on decreasing your AGI here. Next month we’ll cover tax deductions and credits.

Decrease Your Adjusted Gross Income (AGI)

Your adjusted gross income is your total income from everything you earned for the year including salary, self-employment income, dividends, and interest minus any eligible adjustments. These eligible adjustments are called “above the line” because they used to be calculated above the line determining your taxable income. Above the line adjustments are really great because they can be taken with either the standard deduction or itemized deductions.

  • Retirement Accounts

    • Contributions made to retirement accounts can be used to offset your income. Additionally, you have the benefit of growing this money tax-free until you reach retirement age. The most common retirement accounts are a 401k, 403b, 457 plans, and traditional IRAs.

      • If you have a 401k, 403b, or 457 – the maximum contribution for 2019 is $19,000. If you’re over 50, you can make catch-up contributions up to an additional $6,000.

      • If you have a traditional IRA and you are not offered a retirement plan through work, you can contribute up to $6000. If you’re over 50, that goes up by another $1,000. If you’re not offered a retirement plan through work, these contributions can qualify as tax deductible.

  • Student Loan Interest

    • If you or your spouse have student loans that you’re repaying, you can deduct up to $2,500 of interest paid, for those who qualify based on their modified adjusted gross income. The adjustment begins to phase out at $70,000 for single, head of household, and widowers or at $140,000 for joint returns. It completely phases out at $85,000 for single, head of household, and widowers or $170,000 for joint filers.

  • Alimony Payments

    • If you made alimony payments, you can deduct the amount that you paid. You’ll just need the social security number or the individual taxpayer identification number of the person receiving the payments. Find more information on the requirements for an alimony payment here.

  • Self-Employment Tax

    • If you’re self-employed, you need to pay the full tax for Social Security and Medicare. Usually, an employee pays half of the tax and the employer pays the other half. Since you’re both sides of the equation you pay the full thing and half of that tax can be used as an above the line adjustment.

  • Healthcare Savings Account (HSA), Medical Savings Account (MSA) and Flexible Spending Arrangement (FSA)

    • Contributions to your HSA are tax-deductible up to the contribution limit. For 2019, those limits are $3,500 for individuals with single healthcare policies and $7,000 for those with family coverage. Similar to retirement accounts, there is a catch-up allowance of $1,000 if you’re over 55. In order to participate in an HSA, you need to meet a few criteria points, outlined nicely here by the IRS.

    • The Archer MSA is a tax-exempt trust or custodial account that is set up by a financial institution to save money exclusively for future medical expenses. You can claim a tax adjustment for contributions made. The interest made by the account is also tax free. If distributions are made for qualified medical expenses, they can also be tax free. You can find out more about these MSAs here.

    • The FSA account allows employees to be reimbursed for medical expenses through funds that are set aside by your employer through a voluntary agreement. No taxes are deducted from your contributions and the reimbursements paid to you from the account may be tax free. Find out more about FSAs here.

  • Other Adjustments. There are plenty of others so make sure you talk to a professional and see if you can claim any of the less common adjustments, such as:

    • Moving expenses related to a job or business move

    • Self-employed SEP, SIMPLE, and qualified plans

    • Moving expenses for members of the Armed Forces

    • Penalty on early withdrawal of savings

    • Self-employed health insurance deduction

    • Certain business expenses of reservists, performing artists, and fee-basis government officials

    • Business expenses of National Guard and reserve members who travel over 100 miles

    • Penalties on early withdrawal of savings

    • Educator expenses (school supplies for a classroom)

    • Jury duty pay that was forfeited to your employer

If you believe you qualify for any of these, you should ensure that you’ve take the right steps to set them up correctly. As always, consulting with your accountant is a great first step. Make sure you check back next month when we release our second part on this topic about itemized deductions and tax credits.


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