Tax Essentials: Above-the-Line Deductions

Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) — In my "Tax Tip "These Are the Most Important Numbers on Your Tax Return," I introduced you to "above the line" deductions, aka "Adjustments to Income," which reduce your Adjusted Gross Income. Let's take a look at some of these deductions.

EDUCATOR EXPENSES:

Teachers, counselors, principals and aides of students in kindergarten through 12th grade, who have worked at least 900 hours during the school year, can deduct up to $250 of unreimbursed out-of-pocket expenses for books, supplies, computer software, equipment, and other classroom materials. If both husband and wife are qualified educators, they each get up to $250. Educators who spend more than $250, as most do, can deduct the excess as an "Employee Business Expense" on Schedule A if their total miscellaneous deductions exceed 2% of Adjusted Gross Income (AGI).

This deduction has been extended through 2013 only, and expired on December 31, 2013. Congress has not yet extended it for 2014 and beyond.

TUITION AND FEES:

Most undergraduate college students get the best tax benefit by claiming the American Opportunity Credit. Graduate students can claim either a Lifetime Learning Credit or the special Tuition and Fees Deduction.

Joint filers with an AGI of $130,000 or less, and single filers with AGI of $65,000 or less, can deduct up to $4,000 in qualifying expenses for tuition and fees and required books, supplies and equipment. The deduction is limited to $2,000 for married couples with an AGI of between $130,001 and $160,000 and singles with AGI between 65,001 and $80,000.

This deduction also expired on December 31, 2013 and has not yet been extended it for 2014 and beyond.

MOVING EXPENSES:

Did you move because of a new job or a new job location? You can deduct the out of pocket costs of moving your household goods (including your pet) to your new location and travel expenses (including overnight lodging, but not meals) while on the road for one trip for yourself and each member of your household. You can claim a standard mileage allowance of 24 cents per mile if you drive. If you and your spouse each have a car, and you each drive your car to your new location, you can both claim the mileage allowance for the trip. You can also deduct storage and insurance of your household goods for up to 30 days after leaving your former residence if you move within the U.S.

You must meet a distance test and a time test. The distance between your new job and former residence must be at least 50 miles more than the distance between your old job and former residence. If you are an employee you must work full-time at your new location for at least 39 weeks in the 12 months following the move. If you are self-employed you must meet the same test, and also work full-time for a total of at least 78 weeks during 24 months following the move. Any combination of full-time employment and self-employment will satisfy this test.

If you are married, only one spouse must satisfy the time test.

ALIMONY:

You can deduct alimony paid to a former spouse under a divorce decree. To be deductible the payments must be in cash (or check) and required as a condition of the divorce agreement. You and your "ex" must not live together in the same household, and payments must end upon the death of the "ex".

The deduction is not limited to support payments. You can also claim any payments required under the terms of the agreement that you make to a third party on behalf of your former spouse. This includes payments for medical expenses, health insurance premiums, housing costs, taxes, tuition, and life insurance premiums (if the former spouse owns the policy).

The above rules also apply to separate maintenance payments made under a separation agreement. Child support is not deductible.

STUDENT LOAN INTEREST:

You can claim up to $2,500 in interest paid on qualified student loans used to pay for post-secondary education - college or vocational school - for yourself, your spouse, or a dependent.

In order to claim a deduction you must be legally obligated to repay the loan and you must actually make the payments. If the student and the parents are both legally obligated to repay the loan, for example a parent has co-signed the loan, the deduction is claimed by whoever actually makes the payments.

If you are claimed as a dependent on your parents', or anyone else's, tax return you cannot deduct student loan interest on your return.

The amount you can deduct is phased out as your "modified" Adjusted Gross Income (MAGI) goes from $60,000 to $75,000 if you are single, or from $125,000 to $155,000 on a joint return. You cannot claim the deduction if you are married filing separately.

Interest on a loan from a related party or from a qualified employer plan, such as a 401(k), are not deductible.

LEGAL FEES:

Generally if you receive a legal judgment or settlement that does not relate to actions involving physical injuries you must report the entire amount in gross income on Line 21 of your Form 1040 and deduct related contingent legal fees and expenses as a Miscellaneous Expense on Schedule A, subject to the 2% of AGI exclusion.

But legal fees and expenses related to taxable awards, judgments and settlements from unlawful discrimination lawsuits can be deducted in full as an Adjustment to Income. This also applies to legal fees relating to IRS whistle-blower awards and monies received from certain claims against the federal government and private causes of action under the Medicare Secondary Payer law.

There is no separate line on the Form 1040 for this deduction. You add the amount of legal fees and expenses in the amount reported on Line 36 and enter the code UDC if related to unlawful discrimination or WBF if related to IRS whistle-blower awards on the dotted line to the left of the amount.

—Written by Robert D. Flach for MainStreet

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