By Amy Higgins
The Cincinnati Enquirer
You don't have to itemize your deductions to see some serious savings on your tax bill this year.
Many of the cuts coming courtesy of President Bush's 2001 $1.35 trillion tax cut come in the form of "above-the-line" deductions and credits that anybody can take, whether they claim itemized or the standard deduction.
Credits reduce your actual tax bill, while deductions reduce the amount of income that is subject to tax. A $1 credit reduces your taxes $1, while a $1 deduction reduces your taxes 15, 27 or 31 cents, depending on your tax rate.
"For a while, new credits were the hot things," said Mark Luscombe, principal tax analyst for tax publisher CCH Inc. "But now Congress is becoming fond of adding above-the-line deductions."
The line referred to here is the Line 21 on a 1040A or Line 35 on a standard 1040 - the one that arrives at your adjusted gross income, before any itemized or standard deductions are taken.
"An above-the-line deduction directly reduces the amount of income on which tax is calculated, dollar for dollar," Luscombe said. "An itemized deduction only helps if it raises your total itemized deductions above the amount of your standard deduction, and itemized deductions also are subject to various limitations."
New above-the-line deductions for 2002 include:
Up to $3,000 for higher education expenses.
Up to $250 for teachers' nonreimbursed classroom expenses.
Up to 70 percent of health insurance premiums for self-employed taxpayers. (The remaining 30 percent can be taken as an itemized medical deduction.)
Up to $2,500 in student loan interest, no matter how old the loan is. (While not a new deduction, it was previously limited to the loan's first 60 months.)
Up to $3,000 (or $3,500 for people over 50) for traditional IRA contributions. (Also not a new line item, however deductions were previously limited to $2,000 regardless of age.)
Also, don't forget other existing above-the-line deductions for traditional IRA contributions, court-ordered alimony payments, medical savings account contributions and eligible moving expenses.
Credits look like more valuable tax breaks, however, because they have the potential to more drastically cut your tax bill. But they can also be harder to qualify for.
"You will want to check your calculations carefully," Luscombe said.
"Many credits are calculated based on only a percentage of the out-of-pocket expense, tending to reduce their value in comparison to deductions."
New credits this year include:
Up to $1,000 for contributions to a retirement plan, such as an IRA or 401(k), for low-income taxpayers.
Up to $10,000 in qualified adoption expenses
Also don't forget existing credits for dependent care, children, earned income, and certain education expenses.
E-mail ahiggins@enquirer.com
