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Tax Tip: Maximize Certain Above the Line Deductions

December 21, 2018

Under both prior law and the New Tax  Law, so-called “above-the-line” deductions reduce both your “adjusted gross income” (AGI) and your modified adjusted gross income (MAGI), while “itemized” deductions (i.e., below-the-line deductions) do not reduce either AGI or MAGI. Deductions that reduce your AGI (or MAGI) can potentially generate multiple tax benefits, for example by:

  1. Reducing your taxable income and allowing you to be taxed in a lower tax bracket;
  2. Freeing up deductions (and tax credits) that phase out as your AGI (or MAGI) increases (e.g., child credit; certain IRA contributions; certain education credits; adoption credit, etc.); and
  3. Reducing your MAGI below the income thresholds for the 3.8% Net Investment Income Tax (i.e., 3.8 % NIIT only applies if MAGI exceeds $250,000 if married filing jointly; $200,000 if single).

Although many of the popular “above-the-line” deductions were retained under the New Law (e.g., deductions for IRA and Health Savings Account (HSA) contributions, health insurance premiums for self-employed individuals, qualified student loan interest, and business expenses for a self-employed individual).

To view the full white paper outlining several tax planning tips for individual taxpayers please click here.

If you need assistance sorting through the new tax law to determine how it will affect your personal situation call our office at (802) 878-1963 (Williston) or (802) 775-7132 (Rutland). Davis & Hodgdon Associates CPAs has been assisting Vermont individuals and business owners with tax planning and retirement planning for more than 25 years.