‘Above-Line’ Deductions Top Write-Offs, Credits

Come tax time, schoolteachers, military reservists, landlords and performing artists all have at least one thing in common -- they can claim special tax deductions without bothering to itemize.

They’re members of a growing club. People who buy fuel- efficient cars, employees who contribute to health savings accounts and indebted former students all warrant so-called above-the-line deductions.

These deductions are more coveted than mere write-offs and credits because they reduce adjusted gross income, a key figure that’s used to determine whether a taxpayer qualifies for other lucrative breaks tied to overall income.

A regular tax write-off, by comparison, reduces the amount of income subject to tax, which saves between 15 cents and 35 cents on the dollar, depending on the taxpayer’s income bracket.

Tax credits are better because they reduce tax owed on a dollar-for-dollar basis, but they still don’t have the same tax- saving potential as above-the-line deductions.

For example, look at how an above-the-line deduction might affect a family with one child at home and another attending college.

The child tax credit can reduce a parent’s federal tax bill by $1,000 per qualifying child. The catch: Parents who earn more than $75,000 when single or $110,000 when married start to lose their ability to claim the break.

In tax-speak, they’re subject to an income “phase-out” that causes them to lose $50 worth of the child tax credit for every $1,000 that their adjusted gross income exceeds the threshold.

Consequently, a couple with one qualifying child would lose the credit completely once income exceeded $130,000.

That could change substantially if this couple qualified for an above-the-line deduction. If, for example, they were also sending a child to college, they could be eligible for a $4,000 write-off for tuition and fees.

By claiming that break, they’d cut their adjusted gross income to $126,000, which would allow them to squeeze under the income phase-out and claim a partial child tax credit.

The result: Their federal tax bill would drop by $1,200.

Federal adjusted gross income is also the starting point for many state tax assessments, so they would probably save on their state income tax bill too. (But not always -- some states, including California, don’t fully conform with federal law, so some above-the-line deductions, such as those for health savings accounts, won’t cut state tax bills.)

Some of the more noteworthy above-the-line deductions:

* Clean-air vehicles: Buying certain gas-electric hybrid vehicles qualifies buyers for a $2,000 write-off in the year the car is purchased.

This is a write-in, though, so qualifying taxpayers are urged to simply include a note -- and the deduction amount -- on line 35 of the Form 1040.

* Military reservists can claim a deduction for service-related travel expenses when they travel more than 100 miles from home and require an overnight stay. These expenses are claimed on line 24, along with expenses of performing artists and some government officials.

* Educators can claim a deduction of up to $250 to reimburse them for supplies purchased for their classrooms on line 23.

* Employees who contribute to health savings accounts or Archer Medical Savings Accounts get above-the-line deductions of up to $5,650 -- depending on the type of account and their age. The write-off for the health savings account is on line 28; but taxpayers have to write in the deduction for the MSA.

* Former students paying on student loans can deduct the interest on line 26.

* Taxpayers paying expenses for higher education for themselves or a dependent can write off up to $4,000 of that cost on line 27.

* Self-employed individuals can write off the cost of health insurance premiums (line 31), half of their self-employment taxes (line 30) and their contributions to retirement plans (line 32).

* Employees who are not covered by a retirement plan at work can deduct up to $3,000 annually in IRA contributions if they’re under the age of 50.

Older workers get an additional $500 deduction. Workers who are covered by retirement plans can deduct IRA contributions only if they earn less than set amounts.