Adjustments, Deductions and Exemptions - Oh My!

There are three ways to reduce your taxable income – adjustments, deductions and exemptions.  

Adjustments to income are reported on the bottom of page 1 of the Federal 1040 form. Your total income minus any adjustments equals your adjusted gross income (AGI). 

Examples of adjustments:  

Educator Expenses – eligible educators can deduct up to $250 of qualified expenses paid in 2011. 

Health Savings Account (HSA) deduction - HSAs allow a taxpayer to save pre-tax dollars for future healthcare expenses. Contributions to the HSA are tax-deductible. Form 8889 is required. 

Moving Expenses – moving or relocating expenses due to changes in employment.  Form 3903 is required. 

Student Loan Interest – qualified student loan interest paid in 2011. 

Self Employed Taxpayers – may be able to take SEP/Simple contributions, health insurance premiums paid and half of self employment taxes paid as adjustments. 

Traditional IRA - contributions to a traditional individual retirement account (IRA). 

The second way to reduce taxable income is through deductions.  Deductions are reported on page 2 of the Federal 1040 return and are subtracted from your adjusted gross income (AGI).  Taxpayers can either take a standard deduction or they can complete itemized deductions.  The standard deduction is a fixed amount available to every taxpayer that varies depending on your filing status.  Taxpayers who have deduction amounts that total more than the given standard deduction should itemize.  Itemized deductions are listed on Schedule A. 

Here are some expenses that can be included in the itemized deduction total: 

Medical expenses – medical and dental expenses paid in 2011.  You can include only the amount of your medical expenses that exceed 7.5% of you AGI. 

State Income Tax or General Sales Tax – taxpayers can elect to deduct either state income tax or sales tax paid. 

Real Estate Taxes – taxes paid based on the assessed value of your real property. 

Personal Property Taxes – state taxes charged on personal property.  Missouri has a personal property tax.  

 Home Mortgage Interest – interest paid in 2011 on a loan secured by your main home or a second home. 

Charitable Contributions – money or property given to a qualified organization.  The amount to deduct from property donations (i.e. bag of clothes) is determined by the fair market value.  We recommend using garage sale or thrift store prices as a starting point for valuation.  

Other possible deductions include unreimbursed employee expenses, tax preparation fees! or investment expenses.  These expenses are limited to the amount that exceeds 2% of  your AGI.   

Exemptions are the final way to reduce taxable income.  In 2011, you are able to deduct $3700 for each exemption.  You get one exemption for yourself, your spouse, and each of your dependents.  (The IRS has strict criteria for who qualifies as your dependent.) 

So, your total income – adjustments = adjusted gross income (AGI).

Your AGI – standard or itemized deduction – exemptions = taxable income.  

There’s the short version of how to use adjustments, deductions and exemptions to lower your taxable income.   Keep in mind these topics can be very complex.  Please see your tax advisor to see how these apply to your particular tax situation as eligibility and income limitations apply.    

April 17th is coming soon!  We’d be happy to help you file your 2011 tax returns.   

We can be reached at 314-849-6200 or jennifer.bellm@tax.hrblock.com 

Best, Jennifer