Compute Your AGI
Don't Miss Other Above-The-Line Deductions
Here are a few deductions you or your family members may be able to claim. Others are listed in the "Compute Your AGI" worksheet on the previous page.
Student loan interest. In 2012, you may be able to claim an above-the-line deduction of up to $2,500 of interest paid on qualified higher-education loans. In 2012, the deduction phases out for joint filers with modified AGI between $125,000 and $155,000 and for single taxpayers with AGI between $60,000 and $75,000
You can't deduct any interest you might pay on your child's student loan, since only the person legally obligated to make the Interest payments may claim the deduction. But your child could claim a deduction for interest you paid in 2012 on his or her loans (treated as a gift) as long as the child isn't your dependent.
Self-Employment Tax. This tax consists of a Social Security tax and a Medicare tax. The rate for the Social Security portion of the self-employment (SE) tax continues to be 10.4% through the end of 2012. It's scheduled to return to the usual 12.4% in 2013. The Social Security tax applies to self·employment earnings of up to $110,100. The 2.9% Medicare tax applies to all self employment income.
For 2012, you may deduct up to 59.6% of the Social Security tax you pay in computing your AGI. You also may deduct 50% of your Medicare tax.
Self-employed health insurance costs. If you're self-employed, you may be entitled to deduct 100% of health and dental insurance costs for yourself, your spouse, your dependents, and any qualifying children who haven't attained age 27 as of the end of the tax year. Your deduction can't be more than your earned income from the trade or business for which you established health coverage. (Other requirements apply.)
Another step in planning your taxes is to project your itemized deductions. Every tax deduction you can claim will help reduce your tax liability. To estimate the tax benefit of a deduction, multiply the amount of the deductible
expense by your marginal tax rate (the rate that applies to your last dollar of taxable income).
A traditional year-end strategy is to try to increase your itemized deductions by paying deductible expenses in the current year that you'd pay the next year anyway. This strategy could be particularly valuable in 2012. As the tax law
currently stands, in 2013, higher income taxpayers may see their itemized deductions reduced when an overall limitation on itemized deductions that was in effect before 2010 is reinstated.
Deduct Other Taxes Paid
Individuals who itemize can claim deductions for real property taxes, and for state and local income taxes paid. You also can deduct such items as personal property taxes, foreign real property taxes, and foreign income taxes (especially on investment income). Alternatively, you may be able to claim the foreign tax credit.
To increase your itemized deductions:
- Pay state or local income taxes early by making any January 2013 estimated tax payments in late 2012.
- Increase your state or local tax withholding for the rest of the year.
- Note: These strategies may not be beneficial if alternative minimum tax (AMT) could be an issue for you in 2012.
Claim all your home mortgage interest
One of the advantages of home ownership is the ability to deduct mortgage interest payments. You may deduct qualified residence interest on acquisition indebtedness and home-equity indebtedness (within limits). So, when making large purchases such as a new car, you may want to consider using a home-equity line of credit. That way, you'd potentially be able to deduct your loan interest.