12.2 Claiming Deductions From Gross Income

Many deductions taken directly from gross income in arriving at adjusted gross income are deducted on Form 1040 schedules devoted to a specific activity, such as business deductions claimed on Schedule C (Chapter 40), capital losses claimed on Schedule D (Chapter 5), and real estate rental expenses claimed on Schedule E (Chapter 9).

Other expenses are claimed directly from gross income on page 1 of Form 1040 or Form 1040A in figuring adjusted gross income. On Form 1040, these deductions, claimed on Lines 23–36, are referred to as “above-the-line” deductions, as they reduce total (gross) income shown on Line 22 regardless of whether itemized deductions are claimed. On Form 1040A, only a few deductions are allowed in figuring adjusted gross income: traditional IRA deductions, student loan interest, and, if allowed by Congress for 2012, educator expenses and tuition and fees.

Deductions for educator expenses and tuition/fees not yet extended to 2012 when this book went to press.

The above-the-line deductions for educator expenses and tuition and fees expired at the end of 2011, and legislation to extend the deductions to 2012 had not yet been enacted when this book went to press, but an extension was still expected; see the e-Supplement at jklasser.com for an update. Assuming there is an extension, the following rules will apply on 2012 returns:

Educator expenses.

If you were a teacher, instructor, counselor, principal, or aide in a private or public elementary or secondary school (kindergarten through grade 12) for at least 900 hours during the school year in 2012, you generally may deduct up to $250 of out-of-pocket costs for books and classroom supplies. Eligible expenses include computer equipment, including related software and services, other equipment, and supplementary materials used in the classroom. For courses in health or physical education, supplies must be related to athletics to qualify. Home schooling expenses do not qualify. If you are married filing jointly and you and your spouse both qualify as educators, each of you may deduct up to $250 of your qualified costs, for a $500 maximum on your joint return.

If eligible expenses exceed the $250 limit, the excess may be deductible as a miscellaneous itemized expense on Schedule A of Form 1040 (19.1).

The $250 deduction limit may have to be reduced or eliminated completely if certain tax-free amounts are received during the year. The deduction is reduced by tax-free interest on savings bonds used for tuition (33.4) and tax-free distributions from qualified tuition programs (33.5) and Coverdell education savings accounts (33.12).

Tuition and fees.

Up to $4,000 of college tuition and fees paid in 2012 may be deducted on Form 8917 if MAGI does not exceed $65,000 for single and head of household filers and $130,000 for joint returns. A deduction of up to $2,000 is allowed for single and head of household filers with MAGI exceeding $65,000 but not $80,000 and for joint filers with MAGI exceeding $130,000 but not $160,000 (33.13).

Overnight travel costs of Reservists and National Guard members.

Armed Forces Reservists and National Guard members who travel over 100 miles and stay overnight to attend Reserve and Guard meetings may deduct their travel expenses as an above-the-line-deduction to the extent of the Federal Government per diem rate for that locality (35.8).

Expenses of performing artists.

If you are a performing artist, you may be able to deduct job expenses from gross income, but only if your income is extremely low. You must have:

If you are married, a joint return must be filed to claim the deduction, unless you lived apart from your spouse during the whole year. The $16,000 adjusted gross income limitation applies to your combined incomes. If both spouses are performing artists, the $16,000 adjusted income limit applies to the combined incomes, but each spouse must separately meet the two-employer test and 10% expense test for his or her job expenses to be deductible on the joint return.

You report the performing artist expenses on Form 2106 (or Form 2106-EZ where eligible) and enter the total on Line 24 of Form 1040, instead of on Schedule A. If you do not meet the tests, the expenses are deducted on Schedule A subject to the 2% AGI floor (19.1).

State and local officials.

State and local officials paid on a fee basis may deduct from gross income unreimbursed business expenses.

Health savings account (HSA) deduction.

If you are self-employed and have coverage under a high-deductible health plan, are not entitled to Medicare benefits, and are not the dependent of another taxpayer, you generally can deduct contributions to an HSA within the limits discussed in 41.10. If you are an employee, and your employer has contributed less than the applicable limit to an HSA on your behalf, you may contribute the balance and deduct it from gross income (3.2).

Moving expenses.

Deductible moving expenses are discussed in this chapter (12.3–12.8).

Deductible part of self-employment tax.

After you figure your self-employment tax liability on Schedule SE, you deduct a portion of it as an above-the-line deduction. The computation of the deduction for 2012 reflects the fact that the 2% payroll tax cut in effect for 2012 reduces the self-employment Social Security tax rate to 10.4%, but the deduction is based on a 12.4% rate (as if the 2% reduction did not apply). Follow the steps of Schedule SE to figure your self-employment liability as well as the above-the-line deduction (see 45.3–45.4).

Keogh plan contributions and self-employed SEP or SIMPLE deductions.

See Chapter 41 for details on these deductions.

Self-employed health insurance deduction.

If you were self-employed with a net profit in 2012, you may deduct from gross income 100% of premiums you paid in 2012 for medical and dental insurance, and qualified (see below) long-term-care insurance, for yourself, your spouse, your dependents, and your children who at the end of the year are under age 27(whether or not your dependents).

You are treated as self-employed for purposes of the 100% deduction if you are a general partner with net earnings, a limited partner receiving guaranteed payments, or a more-than-2% shareholder in an S corporation from which you received wages.

As a sole proprietor, you may claim the 100% above-the-line deduction whether the policy is purchased in your own name or the name of the business. If you are a more than 2% shareholder-employee of an S corporation, the IRS position is that the S corporation must “establish” the health plan, but the plan can be considered “established” by the S corporation even if you obtain the policy in your own name, so long as (1) the corporation makes the premium payments to the insurance company or the corporation reimburses you for premiums you pay, and (2) the premiums are reported as wages on your Form W-2 and on your tax return. Similarly, if you are a partner, a health plan in your name is considered “established” by the partnership if (1) the partnership pays the premiums or you pay them and are reimbursed by the partnership, and (2) the partnership reports the premiums as guaranteed payments on Schedule K-1 (Form 1065) and you include the payments as income on your tax return.

Medicare premiums qualify for the 100% deduction, since they provide insurance that constitutes medical care. As with other health insurance premiums, premiums paid for Medicare coverage of your spouse, dependents, and children who at the end of the year are under age 27 may be included in the 100% deduction

If you have a qualified long-term-care policy, the 100% deduction applies to the premiums that would be deductible as an itemized deduction under the medical expense rules. This amount depends on the age of each person covered. For example, if in 2012 you paid long-term care premiums for yourself and your spouse, and both of you are age 57 at the end of 2012, premiums of up to $1,310 for each of you are includible in the 100% deduction, assuming the policy is a qualifying long-term care policy (17.15).

Restrictions on the 100% deduction. The 100% deduction may not exceed your net profit from the business under which the health premiums are paid, minus the deductible part of your self-employment tax liability and your deductible contributions to Keogh, SEP, or SIMPLE retirement plans.

The 100% health insurance deduction may not be claimed for any month during 2012 that you were eligible to participate in an employer’s subsidized health plan, including a plan of your spouse’s employer or a plan of the employer of your dependent or child under age 27 at the end of 2012. If the deduction would be barred for any month because of such eligibility and you have long-term-care coverage that is not employer subsidized, you may claim the 100% deduction for the portion of the long-term-care premiums that is deductible for your age (17.15).

The instructions to Form 1040 and IRS Publication 535 (Business Expenses) have worksheets for figuring the self-employed health insurance deduction.

Penalty on early savings withdrawals

(4.16).

Alimony paid.

See Chapter 37.

Traditional IRA contribution.

The deductible limits, including the phaseout rules for individuals covered by employer retirement plans, are explained in 8.3–8.4.

Student loan interest.

Within limits, you may deduct interest you pay on a qualified student loan (33.14).

Domestic production activities deduction

(40.23–40.25).

Attorney fees in employment discrimination cases.

Attorney fees and court costs in actions involving unlawful discrimination claims are deductible on Line 36 of Form 1040 if they were paid with respect to settlements or judgments occurring after October 22, 2004. The deduction may not exceed the amount included in income as a result of the judgment or settlement (11.7).

Archer MSA contribution.

If you are self-employed or employed by a qualifying small business and have high-deductible health coverage, a deduction for contributions to an Archer MSA account may be deductible. The deduction is figured on Form 8853 and then entered on Form 1040 (41.13).

Jury duty pay turned over to employer.

If you receive your regular pay while on jury duty and turn over your jury duty fees to your employer, report the fees as other income on Line 21 of Form 1040 and claim an offsetting above-the-line deduction on Line 36 of Form 1040.

Repayment of supplemental unemployment benefits.

You may claim a deduction from gross income for the repayment or in some cases a tax credit (2.9). Claim the deduction on Line 36 of Form 1040 and on the adjacent dotted line write the amount and label it “subpay TRA” (trade readjustment allowances).

Reforestation amortization.

If you do not have to file Schedule C or F to report income from a timber activity, an amortization deduction for qualifying reforestation expenses may be claimed over an 84-month period; see Code Section 194 for details. On Line 36 of Form 1040, the amortization deduction should be labeled “RFST.”

Costs incurred in obtaining whistleblower award from the IRS.

You may claim an above-the-line deduction for costs you incurred, including attorneys’ fees, in connection with obtaining a whistleblower award from the IRS as an informant, up to the amount of the award reported as income. Label the deduction on Line 36 of Form 1040 as “WBF.”