You can lower your tax bill for the year by taking advantage of adjustments that reduce your overall taxable income. Traditional IRA contributions are one kind of adjustment: the deductible amount you contribute lowers, or “adjusts,” your taxable gross income for the year. These adjustments occur before you take your standard or itemized deductions, so you don’t need to itemize to benefit from them.
To include these adjustments on your return, you may need to fulfill certain conditions or fall within certain income limits. Use this column as a starting point to find adjustments you can take for 2011 and plan to take in 2012. You can find more information by visiting the IRS website or talking over your situation with a tax professional. Tax software also can help you determine if you qualify for these adjustments.
•Health savings accounts. Contributions to a Health Savings Account reduce your taxable income for the year. Additionally, distributions taken from the HSA are not taxed, as long as they are used for qualified medical expenses. If you plan to open an HSA in 2012 and spread your contributions out evenly throughout the year, now is a good time to look into eligibility requirements and find room in your budget for contributions.
•Moving expenses. If you move to or from Guam for work during the tax year, you may be able to deduct some of your moving expenses as an adjustment to your income. The cost of travel for you and members of your household, as well as the cost of storing and moving your household goods and effects, are some of the potential adjustments you can make if you meet the time and distance requirements.
There are also special rules for members of the Armed Forces, retirees, and survivors. If you moved in 2011 or plan to move in 2012, find out if this adjustment applies to you, and consider the expense records you need to keep or find in order to use the deduction.
•Tuition and fees. You may be able to claim up to $4,000 in a tuition and fees deduction for 2011, for qualified higher education expenses that you pay for yourself, your spouse, or a dependent. To claim this adjustment to your income, you must fulfill income requirements, and pay those expenses during 2011 for academic periods starting in 2011 or starting in first three months of 2012.
Just keep in mind, if you use this deduction, you can’t use the American Opportunity Tax Credit or the Lifetime Learning Tax Credit for the same student’s expenses in the same year. If you qualify for one of the tax credits, you may receive a greater tax benefit, so make sure you understand all of the options available to you as you prepare your taxes.
•Student loan interest. If you pay interest on qualified student loans, you can deduct up to $2,500 in interest. You use this adjustment as long as you fulfill the requirements for claiming the deduction, including income limits set by the IRS for the year.
You may qualify for additional adjustments to your income, such as educator expenses, alimony and self-employed health insurance. Take your time and search for these adjustments, so that you can take advantage of all of the tax benefits you deserve.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. You can email him at firstname.lastname@example.org.