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The Only Tax Deductions Most Americans Can Use

By Matthew Frankel, CFP® - Apr 30, 2016 at 10:41AM

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You can use these deductions whether or not you choose to itemize.

Source: Pictures of Money (Flickr).

When you read about the most valuable tax deductions, you'll surely come across the mortgage insurance deduction and the charitable deduction, just to name a couple. However, you can only use these deductions if you itemize, and only 29% of Americans do that. In other words, tax breaks like these don't help the majority of Americans at all. However, there is a small group of deductions that all Americans can take advantage of whether they itemize or not. Here's what you need to know about these deductions, and which ones are not being used by nearly enough people.

Adjustments to income
The deductions that anyone can take, regardless of whether they itemize, are often called above-the-line deductions. Technically speaking, these are not deductions at all, but adjustments to income. These are subtracted from taxpayers' gross income to arrive at a figure that's appropriately called adjusted gross income, or AGI.

There are about 20 potential adjustments to income listed on the IRS's website, but some of these apply to few taxpayers. Here's a list of some of the more common adjustments:

  • Contributions to a traditional IRA: Depending on your income and whether you have a retirement plan at work, you can deduct up to $5,500 in traditional IRA contributions for 2016. If you're aged 50 or above, the limit is $1,000 higher.
  • Educator expenses: Qualified K-12 teachers can deduct up to $250 worth of unreimbursed out-of-pocket classroom expenses.
  • Student loan interest: You can deduct the interest you paid on qualifying student loans, up to a maximum of $2,500. This deduction is subject to income limitations.
  • Tuition and fees: You can deduct up to $4,000 (depending on your income) in tuition and fees you paid to an eligible higher education institution. Note that this deduction cannot be used in conjunction with either of the tuition tax credits.
  • HSA contributions: Qualified contributions to a health savings account are deductible up to $3,350 (self-only) or $6,650 (family).
  • Moving expenses: If you moved for job-related reasons, you can deduct certain expenses you incur. Note that this is subject to employment and distance requirements.
  • Half of the self-employment tax: When you're self-employed, you're responsible for paying both parts (employer and employee) of the payroll taxes for Social Security and Medicare, known as the self-employment tax. Half of this amount can be taken as an adjustment to income.
  • Self-employed health insurance: If you're self-employed, you can deduct any health insurance premiums you pay for yourself and your family.
  • Payments to self-employed retirement plans: This includes qualified contributions to accounts such as a SEP-IRA, SIMPLE IRA, and solo 401(k).
  • Alimony paid: If you pay alimony to a current or former spouse, it can be used as an adjustment to your income. On the other hand, if you receive alimony, you must report it as income on your tax return.

How many Americans use these?
According to IRS data, here's how many Americans used each of these deductions on their 2014 tax returns:

Adjustment to Income

Number of Tax Returns With This Deduction

Average Deduction Amount

IRA contributions



Educator expenses



Student loan interest



Tuition & fees



Health savings account (HSA) contributions



Moving expenses



Half of self-employment tax



Self-employed health insurance



Contributions to self-employed retirement plans



Alimony paid



Are Americans using these tax breaks wisely?
Now, some of these are what they are -- for example, there are only so many educators who could claim classroom expenses, and the self-employment tax deduction is naturally limited to those Americans with self-employment income.

However, some of these are surprisingly underused. The one that stands out to me the most is the IRA deduction, which is taken on just 1.8% of returns. And the same can be said for the self-employment retirement plan deduction -- over 19 million people paid self-employment tax in 2014, but less than one million contributed to a retirement plan.

Tax-advantaged retirement accounts are some of the best possible places to put your money. Not only can you get a nice tax break now, but your money can grow and compound on a tax-deferred basis to help create the retirement of your dreams. The bottom line: If you want to lower your tax bill, you should seriously consider contributing to a retirement account this year, and here's a guide to help you find the best option for you.

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