Welcome to the Tax Blog

24 June 2018

With the thriving military bases in the region, Hampton Roads is blessed with many military retirees. (I find it ironic we are called ‘retirees’, since many of us work just as hard (or harder) after leaving the service as we did when we were on active duty!) Some interesting tax issues often arise in the year a member leaves military service. I lived a few of these issues, and see even more as a tax professional. Hopefully this article will help some of my newly retired (or about to retire) brothers and sisters in making transition to civilian life a little smoother.

That First State Tax Return Can Be a Doozy! Many of us took advantage of the Servicemembers Civil Relief Act (SCRA) to avoid paying state income taxes while we were on active duty. I sure did. At the beginning of my first duty station in Florida I marched down to the Duval County Courthouse and registered my domicile in Florida. Took that paper to my personnel office, and skipped out on paying state income taxes for the next 20 years.

Spouses weren’t covered by the SCRA back then, so my lovely wife Tade has been filing in Virginia since we moved here in 2001. I didn’t have to start filing here until I retired from the Navy in 2010. Even though many military spouses are now exempt from state taxes by the Military Spouse Residency Relief Act (MSRRA), I still see many couples in the situation Tade and I were in; one spouse is a Virginia resident, and the other is not.

In my opinion, Virginia handles this situation very sanely. Even if the married couple files their federal return jointly, Virginia allows them to file separately if one is a resident and the other is not. Not all states allow you to have a different filing status on your state return than you have on your federal return. Virginia makes it the only correct way to file if one of you is not a Virginia resident. I find that simple to comprehend. Unfortunately, most do-it-yourself tax software has a lot of trouble when you try to change filing status between your federal and state returns.  I've had a few clients successfully figure out how to do this, but not many.

The more difficult situation arises in the year of retirement. We can continue to use my situation as an example. Tade was a Virginia resident all of 2010. Paul became a Virginia resident on December 1, 2010. How did we file our 2010 Virginia taxes?

Tade filed the same way she always did - her status was married filing separately, and she was a full-year resident (form 760). Paul also filed in Virginia as married filing separately, but on a Virginia part-year resident return (form 760PY). We had to use two different forms to file in Virginia! Good luck getting your do-it-yourself tax software to help you get to that conclusion.

Worse still are the state returns for folks whose transition meant they were part year a resident of one state, and part year a resident of another state. It can be quite challenging to get the interplay between the state returns to be right in these situations. I pay $1,200 annually for my tax software, and I’ve been known to throw my hands up (mutter some sailor-like words about the parents of the people who designed my software), download blank forms from a state website, and fill them out by hand to get the correct tax result.

The bottom line on this issue is that your state tax return(s) in the year of your transition out of the military can be more challenging to prepare than usual. Don't expect your off-the-shelf software solution to walk you to the right answer. They don't deal with this problem very often. (Fortunately, you don't either!)

Increased Income Means Increased Taxes. Many military retirees experience increased income when they leave the military. They get a job for as much as (or more than) they were making while on active duty. They also begin receiving their military retired pay. The increased stability of not having a military move looming in the future means spouses may also see a bump in pay as well. It is not uncommon for me to see a family’s income double within a year of a military retirement.

As I have previously written, there is an income zone (that I call ‘the crease’) where your income taxes will increase significantly faster than your income.* This zone sits just above the income level of many military families. When their income increases right after a military retirement, they can shoot into (or through) that zone, and the tax impact can be dramatic. One couple saw a 70% increase in income, but their tax bill more than tripled!

Higher incomes can (and probably should) lead to higher taxes, but there are ways to be proactive about managing the situation to keep your tax bill from exploding. The solutions are unique to the individual situation, but nearly all require advanced planning. Very little can be done to mitigate taxes after the tax year is over. You need to plan and act ahead. Please contact me if you want assistance developing your tax strategy.

(* The revision of the federal tax laws that went into effect in 2018 (also known as the Tax Cuts and Jobs Act) made some changes that should help flatten out 'the crease' as described in my linked article from 2016. Notably, starting in 2018 the child tax credit does not begin phasing out for families until their adjusted gross income is more than $400,000.)

Your Military Pension is Taxable in Virginia. The Commonwealth offers some generous tax breaks to military personnel, but not much after you retire. Virginia will tax your military retired pay as regular income. The DoD will follow your instructions and/or the withholding tables provided to them by Virginia to determine how much to withhold for Virginia taxes. IT’S ALMOST NEVER ENOUGH.

Here’s how this scenario frequently plays out: You leave the military after 20+ years of service, having not paid state income taxes for decades. You get a civilian job. The pay is good, but there’s that new line on your pay stub/earnings statement for “Virginia Tax Withheld”. It isn’t much, but it’s a bit annoying since you never paid it before. You also start getting retirement pay (Woo hoo! Free money!) There’s that annoying line on your retiree statement for Virginia taxes, too. Then you file your first Virginia income tax return and find out you owe them thousands of dollars because neither your employer nor the DoD were withholding enough to cover your Virginia tax bill.  It happened to me, and I’m pretty knowledgeable about taxes!

Setting up your tax withholding is another area that requires a little prior planning. It can be tricky. See me if you want some assistance with that. I learned my lessons on that one the hard way, but I learned them well!

If you bothered reading this article it’s probably because you are recently retired from the military, or you are about to retire. It’s an exciting time. I remember feeling a bit anxious about the future during the year of my transition. (Not about taxes, but life in general.) If I could do it over again I would relax a little bit and dream bigger from the start. I learned more in my decades of service than I knew. You probably did, too. Congratulations on getting to this next stage, and thank you for your service!

• Filing Status
• Virginia State Taxes
• Military Tax Issues

13 May 2018

I frequently encounter new landlords who are confused and/or frustrated by their tax situation. They decided to turn their house or condo into a rental business, but they didn't fully understand the tax implications of doing so. Now they are paying both financially and emotionally.

In an effort to save at least a few people from this fate, I am providing you with this quick “Top 5” list of tax issues you should consider before you decide to become a landlord.

1. Your Mortgage is Not Deductible. If life (or being a landlord) were simple, the mortgage on your rental property would be deductible. This would give you a simple formula to figure your rental income.

You take in $1200/month in rent;

You pay the bank $1,000/month for your mortgage

You make$200/month or $2,400 for the year

Boom - you’d be done!

In reality it’s not even close to being that simple!

A mortgage is typically paying 4 different things in one payment: (1) principal on the loan, (2) interest on the loan, (3) real estate taxes, and (4) insurance. You have to break out each of those expenses separately on your tax return. Interest, insurance, and real estate taxes are all deductible expenses as paid. The principal, however, is deducted through a cost recovery system that we typically refer to simply as ‘depreciation’. More on that later. For now just be aware you cannot directly deduct your mortgage payments on your tax return. It's not that simple.

2. You Must Track Everything. By renting your property you have opened a business. The IRS considers you to be operating a business. So does the Commonwealth of Virginia. If you aren’t treating it like a business, then you risk learning some expensive lessons down the road. Businesses need records, so get a record keeping system in place. (Hint: a box of receipts is NOT a record keeping system.) A spreadsheet will do if you just have 1 or 2 properties. More than that and you’re probably going to want some sort of accounting software.

Track all the expenses for the property. Once you’ve turned it into a business, everything you spend on the property is a business expense. Make sure it gets recorded in your spreadsheet (or bookkeeping system you adopt).

Get a separate bank account for your landlording activities. It’s a business, it deserves its own bank account. Don’t run personal expenses through the landlord account. Don’t run business expenses through your personal account. Keep them separate. It keeps the bookkeeping cleaner if you do, which makes it look like you’re treating your rental activities like a business. 

3. You Can Be Creative with Expenses. Within reason, of course. You can’t take your kids to a Taylor Swift concert and then write it off as a business expense. There are, however, some reasonable ways to save on taxes and meet multiple goals. Here is one of my favorite examples.

The grass needs to be cut at the rental property. You have a 14-year-old son. Pay him $50/week to mow the grass. That’s what you’d pay a professional service to do it. Over the course of the mowing season your kid makes $1,200. You have to issue him a W-2. However, his income is below the threshold for paying federal or state income tax. Because he is your child and under the age of 18, he does not have to pay Social Security or Medicare taxes, either. (So you don't have to bother with withholding these taxes.) He now has $1,200 of earned income tax free. You have a $1,200 deductible expense against your rental property business.

Open a  Roth IRA for him and put the $1,200 in it. He can contribute the entire amount of his earned income up to $1,200. When he is ready to go to college he can pull that $1,200 out and spend it on college with no tax consequences. Long story short - you just got a $1,200 tax deduction for saving money for your kid’s college.

If you think you have a creative idea on how to get the most out of the tax benefits of being a real estate investor, it’s probably best to get a professional opinion on them first. Creative is good, until it crosses the line into illegal. Nobody wants that.

4. If You Earn Over $150K, Your Losses are Suspended. Our beloved government has classified rental activity as passive activity. (Which I find ironic, because most landlords I know are working their tails off!) When you lose money at a passive activity it is known as passive activity losses (PAL). PAL are only deductible against passive incomes....UNLESS the PAL is from residential real estate and your modified adjusted gross income is less than $100,000. If that is the case, then you are able to deduct up to $25,000 of PAL against other income (like your wages from a job). If your income is above $100,000 then the amount of PAL you can deduct is reduced. At $150,000 of modified adjusted gross income you can not deduct any PAL against other (non-passive) sources of income. However...

The PAL isn’t lost if you can’t deduct it. It is suspended. Suspended passive losses are carried over to future years. You can use the suspended passive losses against future passive income, or you can use them when you sell the property. I’ve written about this extensively elsewhere, but for now just be aware that your passive losses are suspended if your modified adjusted gross income is greater than $150,000 and that you still need to track those losses so that you can use them in the future.

5. Depreciation & Recapture. This is a very complicated topic, so I am just going to give you the two highest points in this article.

A. You must depreciate your rental property. I know you don’t want the value of your property to actually decrease, but that isn’t what depreciation means in this context. Depreciation is used to represent a method of recovery for the cost of your property. Instead of deducting the principal part of your mortgage, you deduct the cost of your property by taking a depreciation expense for it. Four things to remember about taking the depreciation expense:

(1) Only the building depreciates. The land does not depreciate. The land value must be removed from the overall value of the property when figuring your depreciation expense.

(2) If your building is residential rental property it depreciates in a straight line over 27.5 years. (Why 27.5 years? Because Congress says so.)

(3) If you make capital improvements to the building before it is placed in service as a rental property, the cost of those improvements is added to the basis of the building and depreciated over 27.5 years with the rest of the building.

(4) If you make capital improvements to the building after it is placed in service as a rental property, those costs are capitalized and depreciated separately over 27.5 years.

B. You must REPAY the depreciation expenses when you sell the property. Unless the property actually depreciated (which is rare). There are two things you should know about this:

(1) You can escape repaying the ‘depreciation recapture’ only if you die owning the property, or you do a 1031 exchange for another property.

(2) Even though repaying the depreciation is unpleasant in  the year it is repaid, it is rare that taxpayers are net losers at the depreciation game. If you take the long view, even though you pay it back, you got an interest free loan from the IRS. How cool is that? 

Despite number 5 having multiple parts to it, I am still going to call this my “Top 5” list. Being a landlord can be profitable. A big chunk of those profits is tied to the tax breaks you get for investing in real estate. Know what those tax breaks (and pitfalls) are before you blindly leap into landlording. If you have any questions or want some assistance in developing a real estate investing tax strategy, please contact me.

• Residential Real Estate Deductions

23 April 2018

Another tax season has officially come and gone. While I still have a couple dozen clients on extension to complete, I wanted to start blogging again. I like doing taxes, but only doing taxes for 12 hours a day, every day for weeks and weeks was starting to make me a little batty. I'm glad to mix it up a bit again.

I thought I’d kick things off with my annual tax season post mortem on the 5 biggest mistakes I saw taxpayers making during the tax season. These were either mistakes that were repeated often or mistakes that were so costly I want to ensure they remain very rare. Without further ado, let’s dig in!

1. Misunderstanding The Military Spouse Residency Relief Act

The military spouse residency relief act can be confusing, but I’m going to break down how Virginia implements it as simply as I can. If you are living in Virginia because your spouse is here on military orders, you have two options:

1. You can be from the same state as your military spouse
2. Welcome to Virginia!

Several times this year I had clients tell me the military member (stationed in Virginia) was from (pick any state) Montana, but the spouse was a resident of (pick any other state) Ohio.

No. That isn’t how it works.

In this example, the non-military spouse can be from Montana or Virginia. To be from Montana the non-military spouse must have lived in Montana with the spouse and established residency in Montana before moving to Virginia.

There are dozens of details and permutations I have left out of this explanation, but that should cover 90% of the military families I see. Bottom line - as the spouse of a military member you don't have to pay taxes in Virginia if you are from the same state as the military member. Otherwise, you are paying taxes in Virginia.

2. Virginia Returns with the Non-Resident Military Member on Them

Nearly all married couples file their federal returns jointly. They will often get the most advantageous tax result by doing so. The do-it-yourselfers know this, so they prepare a joint federal return. Then it comes time to file their state taxes. He’s active duty and from Florida, and she is not. They know she has to pay taxes in Virginia, but he doesn’t. Let the battle with the software begin!

The states have a variety of ways to handle this situation. Virginia’s solution is that if one spouse is a VA resident and the other is not, then the resident spouse files separately in Virginia - even if they file jointly on their federal return. Most tax software hates that. It will try to steer you toward filing jointly in Virginia. Then his income shows up on the Virginia return and it doesn’t belong there. That’s when people come up with inventive ways to remove the non-Virginian's income from the Virginia return.

The fine folks in Richmond have no idea what your state of residency is. They only know that if you put somebody on the Virginia tax return and then invent some creative way to remove that person’s income, it’s wrong. They add it back on and send you a bill.

You have to remove the non-Virginian from the Virginia tax return. You can play with your software until you figure it out - a few people have cracked the code on that. (Don't ask me how they did it, though, I don't use that software.) Alternatively, you can paper-file your Virginia return. You can get downloadable forms for free from the Virginia Department of Revenue site.

3.  Not Coordinating Withholding among Several Income Streams

Here is how this one normally goes: Martha earned $20,000 from her primary job during the year. She also started working a second job on nights and weekends, earning $20,000 from that. In addition, she receives $20,000 in pension benefits during the year. Altogether she has $60,000 of income. However, the HR folks at job 1, job 2. and the pension administrators don’t know about each other. As far as they know Martha is only earning the $20,000 per year they are paying her. They are withholding taxes as if her total tax bill is going to be based on $20,000 of income.

When Martha comes to see me and I figure her taxes based on the $60,000 she actually brought in, I am likely to find that she did not have enough taxes withheld and she is going to have to write checks to the IRS and VIrginia.

Getting your tax withholding right across multiple income streams can be tricky. The IRS online withholding calculator is pretty good at helping you figure it out. Just make sure you have pay stubs from all your income sources and your most recent tax return when you start. It will ask for a lot of data you won’t have at the ready in your memory banks.

4. Virginia Residents not Using VA529

I only saw this twice, but I hate to see any tax deductions go wasted, so I wanted to address it. Contributions to the Virginia 529 college savings plan are deductible from your Virginia income taxes. Despite this I noted 2 incidents where clients were paying taxes in Virginia and putting money into the 529 plan in another state.

There is no tax deduction for contributions to another state’s 529 plan. Virginia’s 529 plan has good choices, low fees, and can be used in other states, so I can’t think of a compelling reason not to use it if you are paying Virginia taxes. Unless, of course, you don’t like money. (Which would be a strange condition for somebody reading a tax blog!)

5. Charity Receipts

Those flimsy, blank receipts you get for donating items to Goodwill, The Salvation Army, Samaritan House, CHKD, DAV, etc. I have a real love-hate relationship with those things. I am glad the government is encouraging re-use of items, that people can get a tax break for donating their items to charity, and that poor people have access to a lot of used items at good prices to help them make ends meet. On the other hand many taxpayers are quite confused as to how to properly claim this deduction.  They hand me their blank receipt, but when I ask what they had donated they look downright bewildered. They look at me as if to say, I gave stuff to charity and they gave me this blank receipt. Do something with it!

I can see how some confusion might happen. I can’t think of any other place where they hand you a blank receipt and expect you to know what to do. The thrift shop never explains it, either. The guy who takes in your stuff isn’t giving tax advice any time soon. He just hands you the receipt and you’re on your own. (The Thrift Shop isn't allowed to fill it out for you, btw. That's your job!)

You should take a few minutes and fill that out as soon as it is handed to you. The store isn’t going to fill it out for you.  You aren’t going to remember what you donated 6 or 8 months later when it’s time to do your taxes. Take a little time to manage your taxes throughout the year. It is worth it!

 That's my top 5 for this year. I hope you enjoyed it and there were some useful knowledge nuggets in there for you to use. If you have any questions don't hesitate to contact me.

08 January 2018

My plan is to write a new article for this tax blog at least once a week. It doesn’t always work out that way. Some interruptions to this plan are predictable. For example, I anticipate my blogging schedule will get interrupted during tax filing season (mid-January to mid-April). But this year the interruptions came earlier than expected. One thing that happened is that all my children came home for Christmas – that was a happy interruption.

There were a few others, too, but the biggest interruption (disruption?) I encountered is that just before Christmas something happened I was not anticipating – our federal government accomplished something. Both houses of Congress passed tax reform bills, they worked out the differences in a joint conference, and put a bill in front of the President – who signed it! (It was almost as if there was no dysfunction in Washington for a few days.)

Time will tell if this something our government accomplished with the new tax laws was a good thing or a bad thing. There were quite a lot of changes in the tax law, and I suspect we will ultimately judge some to be good and some to be bad. But since these changes are in effect NOW, people (like me) who plan tax strategies aren’t too keen on waiting to see how things work out in the long run. We need answers now to be able to plan and make strategies.

I have been reading (and reading and reading…) about this new tax law. I have a reasonably good understanding of it now, but there are some things that are just not yet knowable. The IRS has not yet had time to develop rules, forms, and instructions for the implementation of the new laws Congress handed them. The manner in which the IRS implements the changes will have a significant impact on future strategy.

Knowing that more is yet to be revealed, I still want to get some practical information about the new changes in this blog. I have received enough phone calls in the past few weeks to know there is an appetite for it. Instead of trying to eat the entire elephant I am going to stick to the issues I think will be of most interest to my clients and readers. These are the topics with which my clients have dealt with, or may need to deal with in the future. So, without further ado, here is my take on the provisions in the new tax law that will likely have the greatest impact on my clients. Remember, these are new rules for 2018. These changes will not impact the tax return you are about to file for 2017.

1. Personal Exemptions are gone. Previously you could subtract around $4,000 for each person you claimed on the tax return. This will no longer be the case starting in 2018. The new law compensates for this change by increasing the standard deduction and increasing and expanding the child tax credit.
2. Increased standard deduction. The standard deduction has nearly doubled. This means that significantly fewer taxpayers will itemize their personal deductions. (This was the ‘simplification’ some politicians spoke of when discussing tax reform.) It is still legal to do either. You may claim the standard deduction or you may itemize your personal deductions. We will do whichever is most advantageous to the taxpayer. The increased standard deduction (coupled with lowered itemized deductions, explained later) means it will now be more advantageous for more people to use the standard deduction.
3. Lower itemized deductions. Personal deductions are itemized on Schedule A. Many of the deductible items on Schedule A have been eliminated or limited.
   1. Mortgage interest on new mortgages for your personal residence (first and second home) is now limited to the first $750,000 borrowed. (This is down from $1,000,000.) Mortgages existing before December 15, 2017 are grandfathered at the $1,000,000 limit.
   2. Interest on home equity loans is no longer deductible just because the loan is secured by your residence. My recently written (and brilliant) article on interest tracing rules should be reviewed. Just be aware that home equity loans and lines of credit are now going to be subject to the interest tracing rules and not exempt from them. No grandfathering provisions were made for existing home equity loans.
   3. State and Local Tax Deduction limited to $10,000. These are your state income taxes, real estate taxes, and personal property (car) taxes. The limit for all these taxes combined is now $10,000. There was no limit to this deduction previously, so this will have a fairly significant impact to the people who itemize their deductions.
   4. Deductions for unreimbursed employee expenses – gone. Taxpayers used to be able to take deductions for expenses they incurred for being an employee. As I wrote about (again, brilliantly!) just a few months ago, these deductions were subject to a 2% of adjusted gross income (AGI) threshold. There were some exceptions made for military personnel, but these deductions are largely gone now.
4. Expanded 529 Plan Usage. Named for Section 529 of the internal revenue code, state-run 529 programs (such as the Virginia 529 Program) have provided Americans a way to receive tax benefits for saving and paying for college. The new tax law expands the 529 program to allow families to use money in their 529 plan to pay for K-12 education as well. Up to $10,000 per year of 529 money can be used for expenses associated with K-12 education, even at private and religious schools.
5. Provisions that will directly impact Real Estate Investors:
   1. Bonus depreciation increased to 100% on properties (tangible pesonal property - a.k.a "stuff" - not real property) with less than 20-year useful life. Landlords are frequently dealing with replacing appliances, carpeting, and other items of personal property. In the past this property could not be expensed in the current year, but had to be depreciated and expensed over multiple years. With 100% bonus depreciation real estate investors can deduct the entire cost of many properties. This includes USED property. Previously the bonus depreciation rules were 50% and only applied to NEW property.
      1. Note 1 – Buildings have a useful life of more than 20 years and are not eligible for bonus depreciation.
      2. Note 2 – This is accelerated depreciation, NOT a pure write off. If you sell the property before it has fully depreciated, you must pay back the excess depreciation expense to the IRS.
   2. 20% deduction on pass-thru income. Taxpayers receiving income as pass-thru from another source (Schedule C, Schedule E, a partnership, or an S-Corp) are entitled to deduct 20% of that income before figuring their taxes. Of all the parts of this new tax law this is the topic on which I’ve read the most, but understand the least. Along with phase outs for the deduction, there are also multiple ways to calculate it. Strategizing on this new tax break situation is also going to depend heavily on the IRS implementation rules – which we will not see for months. For now the best I can tell you is the deduction is there, I think it will be helpful in reducing taxes for some people, and I am waiting for additional information before I recommend a strategy to capitalize on this new tax provision.

That’s where I am going to stop. It’s already a lot to process, and I am just scratching the surface of the tax law changes. The actual document is 1097 pages long, so it will take a lot of smart people a long time to fully digest it.

Fortunately, we have a year to ease into the changes. If new strategies arise during the year you can expect to hear from me. If you have questions, please contact me or ask during your tax prep appointment. I look forward to seeing you this year!

• Above the Line Deductions
• Tax Preparation Business
• Business Deductions
• Residential Real Estate Deductions
• Tax Credits
• Exemptions

04 August 2015

Readers should be aware the tax law signed by the President on 22 December 2017 made many of these provisions obsolete.

Check out my oversimplified diagram of the federal income tax process. It shows the general flow of IRS Form 1040 so you can visualize where each of the tax terms I use fits into the actual process. I color-coded it to make it easier to follow (hopefully). In the blue we have various terms for income. In the green we have all things I call tax benefits (adjustments, deductions, exemptions, credits). In the red are the taxes.

When we are talking about adjustments or adjustments to income we are essentially talking about tax benefits that can reduce adjusted gross income (AGI). Most tax benefits (deductions, exemptions, and credits) are limited by AGI (or modified AGI (MAGI)). In other words, if your AGI is above a certain level you are disqualified from using that tax benefit. Adjustments can reduce your AGI, making you eligible for additional tax benefits. I am a big fan of adjustments.

You will sometimes hear adjustments referred to as above the line deductions. "The Line" being the point before AGI is calculated. It's an accurate term. Adjustments are essentially bonus deductions that can be taken in addition to the standard deduction or the Schedule A itemized deductions. But given their ability to reduce AGI I prefer to call them adjustments (to income).

Let's look at some of these adjustments in detail.

Educator Expenses. If you're a teacher and you spend money on supplies for your classroom you can claim an adjustment of up to $250. Married teachers filing jointly can claim up to $500. You can't have been reimbursed by the school to claim the adjustment. Expenses for home schooling do not qualify.

Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials. Virginia Beach reservists take note: if you travel more than 100 miles from home to perform your duties you can claim an adjustment for your expenses.

Health Savings Account Deduction. If you (not your employer) contributed to your HSA this year, you can claim an adjustment for it.

Moving Expenses. Did you move to Virginia Beach for a new job? If you had unreimbursed moving expenses you can take an adjustment for expenses you incurred. (If your employer paid for the move you don't qualify.)

Self Employed Adjustments - If you have your own business you can take adjustments for part of your self-employment tax, your retirement plan, and your health insurance premiums.

Penalty on Early Withdrawal of Savings. Needed to get your money out of a CD for an unforeseen expense? If the bank levied a fee for the early withdrawal you can write it off your taxes as an adjustment.

IRA Deduction. If you made qualified contributions to a traditional IRA you can take it off your taxes as an adjustment. You must have earned income to contribute to an IRA. Military members can count untaxed combat pay as earned income for taking this adjustment.

Student Loan Interest Deduction. With so much student loan debt this is a big one. You can deduct up to $2,500 for student loan interest you paid. This adjustment goes away when MAGI goes above $80K for individuals, $160K for joint filers. Married filing separately do not qualify for this adjustment. You must be legally responsible for the loan. In other words, paying off your grandchild's loan does not qualify you for this adjustment unless your name was on the loan documents.

Tuition and Fees Deduction. This one is rarely used because the American Opportunity Credit and Lifetime Learning Credits are usually more valuable. However, there is a narrow niche where it makes sense to take this adjustment. Most tax software will automatically compare the benefits between this adjustment and the tax credits for education and give you the best one, but check to make sure you are getting the best tax benefit.

Line 36 (Miscellaneous). This is a potpourri of various rarely used adjustments for things such as forfeited jury duty pay, reforestation expenses, and attorney fees for unlawful discrimination lawsuits. If you have a strange situation, ask your tax preparer, you might qualify for a miscellaneous adjustment.

The ability to reduce your AGI with adjustments can have a snowballing effect in reducing your total tax bill. Not only does it lower your taxable income, but it can also qualify you for additional deductions and credits on your tax return. Make sure you're claiming all of the adjustments for which you are eligible.

• Above the Line Deductions
• Schedule A Deductions
• Tax Credits
• Self-Employment Taxes
• Military Tax Issues