A Closer Look at Adjustments to Income
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A Closer Look at Adjustments to Income
Because adjustments to income are deductions that can be taken whether you itemize or take the standard deduction, they are especially important for all taxpayers to understand. A full list of adjustments is found on Schedule 1 of Form 1040. The more important ones include:
Things To Know
- Contributing to a traditional IRA and an HSA can reduce your taxable income.
- Certain education expenses can reduce your tax burden.
IRA deduction
A great way for most people to increase their adjustments to income is to contribute to a traditional IRA. An individual retirement account, or IRA, is a personal savings plan that allows you to set aside money for retirement, while reducing your taxable income and lowering your taxes as a result. (Other retirement savings vehicles such as the 401(k) also reduce current taxes, but they are not deductions. Instead, these amounts are simply not included in current income to begin with.)
Contributions can be made to your IRA for a given year at any time during that year or by the due date for filing your return for that year (usually, April 15th). For complete information, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
For many people, saving for retirement is the best way to reduce current taxable income, although these funds are taxable when withdrawn years later.
Health savings account (HSA) deduction
An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed. See IRS Publication 969 for details.
Deductible part of self-employment tax
Self-employed people get to deduct the employer-equivalent portion of their self-employment tax, which is akin to the Social Security tax paid by those whose wages are paid by employers. Use IRS Schedule SE to calculate the amount of the deduction.
Moving expenses
If you move to a new home because of a new principal workplace, you were able to deduct moving expenses up until 2017 (IRS Publication 521 provides details and restrictions). You would have to meet both the distance and time tests. This deduction disappeared under the 2018 Tax Cuts and Jobs Act passed in late 2017, effective for 2018 onward. Some exceptions remain for active-duty military personnel.
Self-employed health insurance deduction
If you were self-employed and had a net profit for the year, you can generally deduct, as an adjustment to income, amounts paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, your dependents, and your children who were under age 27 at the end of the year. If you were eligible to participate in an employer-sponsored health plan for any month, you may not include amounts you paid in that month.
Tuition and fees
Qualified education expenses represent a significant adjustment to income, reducing your taxes. Generally, qualified education expenses are amounts paid for tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. An eligible educational institution is virtually any accredited college, university, vocational school, or other postsecondary educational institution. Consult IRS Form 8917 for details. This deduction often needs to be extended by Congress in order to apply.
The various forms and publications are available at IRS.gov.