There are many personal tax deductions you can take only if you itemize your deductions. This requires you to list the amount of each deduction on IRS Schedule A and file it with your tax return. Itemized deductions include many of the most popular tax deductions such as home mortgage interest, medical expenses, charitable contributions, state and local taxes, and unreimbursed job expenses.
However, if you're like most taxpayers, you don't itemize. This is because the standard deduction exceeds the value of all of your itemized deductions. You should itemize if your total itemized deductions are worth more than the standard deduction. About two-thirds of all taxpayers take the standard deduction. Check the IRS website for annual inflation-adjusted standard deduction amounts.
Above-the Line Deductions
If you don't itemize you can forget about deducting things like charitable contributions. But there are still some tax deductions - know as above-the-line deductions - you can take without itemizing. These can be found on the front of your federal Form 1040 in the Adjusted Gross Income section. Technically speaking, these are not deductions at all, but adjustments to income, even though they are also called above-the-line deductions. But, just like a deduction, they reduce your taxable income.
These above-the-line deductions include the following:
Self-employed health insurance. People who are self-employed can deduct:
- contributions to health savings accounts (but payments for health insurance paired with HSAs must be itemized), and
- health insurance premiums (deductible up to the amount of profit from the business).
Health savings account contributions. You can deduct Health Savings Account (HSA) contributions you make with personal funds.
Retirement plan contributions by self-employed taxpayers. These include annual contributions made by self-employed people to their retirement plans, such as SEP-IRAs, SIMPLE IRAs, Keogh plans, and solo 401(k) plans.
IRA contributions. Contributions to IRA accounts (subject to annual threshold limits) may be deductible, depending on your income.
Employee moving expenses. If you moved because of a change in your job location or because you started a new job, you may be able to deduct your moving expenses as a nonitemized deduction. to qualify for the deduction, you must meet tests concerning both distance and the amount of time that you continue to work after moving. For more information, see IRS Publication 521, Moving Expenses.
50% of self-employment taxes. If you’re self-employed, you can deduct half of the 12.4% Social Security tax on net self-employment income, up to an annual ceiling, and a 2.9% medicare tax on all net self-employment income.
Penalty on early savings withdrawals. You can deduct from your income for penalties you had to pay to banks and other financial institutions because you withdrew your savings early from certificates of deposit or similar accounts.
Alimony. You can also subtract amounts you paid in alimony, that is, a court-ordered payment to a separated spouse or divorced ex-spouse. You can’t include child support payments. For more details, see IRS Publication 504, Divorced or Separated Individuals.
Student loan interest. Up to $2,500 of student loan interest is deductible from your gross income provided that your AGI--before subtracting any deduction for student loan interest—is below a ceiling amount.
Be sure to keep good records of all such expenses, even if you don’t itemize.