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Courtesy
of:
Frederik Weller, author of autobiography/memoir Always Courage
soon to be released
ADJUSTMENTS
TO INCOME
Once
the tax payer reaches a point where he/she knows the total income
(called "gross income"), there is a chance to reduce that income
in several legitimate ways. Not all possibilities will apply to
every tax payer, but even one will reduce your taxable income
and that's what your objective is. Let's briefly discuss each
one.
Individual
Retirement Account (IRA) deduction. This applies to what is
known as the "traditional IRA" and does NOT include any contributions
to a Roth IRA. As an incentive to start a traditional IRA, the
law permits you to deduct contributions (up to $2,000 per year).
There are some restrictions, so be sure to read the instructions.
But, if you don't have an IRA, consider starting one. It will
save you tax dollars now and provide an income in the future.
Student
Loan Interest deduction. This is new for tax year 1998, but
it applies to loans you took out in prior years. Read the instructions
to see if you can take this deduction.
Medical
Savings Account deduction. Also new for tax year 1998. Once
again, read the instructions if you made contributions. If you
didn't, consider starting one for the future.
Moving
Expense deduction. This is a big one. There are two key criteria:
The move must be in connection with employment and the new workplace
must be at least 50 miles farther from your old home than your
old home was from your old workplace. So, if you live and work
in Los Angeles and move to San Francisco to work there, you may
be able to take the moving expenses as a deduction. If you live
and work in Los Angeles and move to a new home in Los Angeles,
you probably can NOT take the deduction. If you move to the United
States and get a job, you may be able to take the deduction. As
always, read the instructions, but don't overlook this one.
One-Half
of Self-Employment Tax deduction. This is one often overlooked
by people self-employed and who file a Schedule C. If you are
an employee (you're working for somebody), your employer pays
one-half of employment taxes (FICA, Medicare, etc.) and you pay
the other half. When you are self employed, you must pay the entire
amount of employment taxes. You have to fill out Schedule SE.
To compensate you for being self-employed, you can take one-half
of the self employment taxes as an adjustment to gross income.
Self-Employed
Health Insurance deduction. If you owned your own business
and maintained a health insurance plan that was established under
your business, you may be able to deduct part of the amount paid
in premiums. Read the instructions.
Keogh
and Self-Employed SEP and SIMPLE Plans deduction. These are
retirement plans for self-employed people (like an IRA is for
employees). Just like an IRA contribution may be deductible for
employees, so are contributions to these Plans. Once again, read
the instructions.
Penalty
on Early Withdrawal of Savings deduction. This is tied to
IRA and other savings plans that were designed to provide income
after reaching age 59 1/2. If you have to withdraw money from
these plans prior to reaching age 59 1/2 you will have to pay
a penalty because you withdrew the money before you were eligible.
You will get a Form 1099-INT or Form 1099-OID and it will show
the amount of the penalty. This amount is deductible.
Alimony
Paid deduction. If you made payments to your former spouse
under a divorce decree, you may be able to reduce your income
by taking a deduction. Be sure to show your former spouse's social
security number on the line provided. Why? This amount is income
for your former spouse and he/she will have to pay tax on it.
If you don't show the SSAN, the deduction will not be allowed.
Next
Time: Standard or Itemized Deductions
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