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Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.

• As Recovery Plan Take Early Step in Congress, CCH Issues Special Tax Briefing
• New CCH Coverage of Recovery Plan with Senate Finance Committe Changes
• Senate Passes Recovery Plan with Expanded Homebuyer's Credit, Car Incentives, AMT Patch
• Final Stimulus Plan Provides Tax Breaks for Individuals, Businesses, Environment, Government
• CCH Briefing Analyzes Obama Administration Tax Proposals

You Can Reduce Your Taxes Without Itemizing

(RIVERWOODS, ILL., January 2009) – This is a year when many people will be digging hard for every penny they can save on their taxes. And there are lots of savings to be had, even if you can’t itemize deductions, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

CCH suggests you review these deductions and credits available to itemizers and non-itemizers alike. And be sure to read the tax form and instructions carefully. While some deductions and credits have their own lines on the tax form, others do not. You are required to do some hunting and “fill in the blank” to take advantage of them.

‘Above the Line’ is Best

Amounts that can be directly subtracted from your income in arriving at adjusted gross income (AGI) – so called “above-the-line” deductions or “adjustments to income” – provide a special advantage in keeping down the amount you’ll owe or increasing your refund, according to CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA.

Deductions that reduce adjusted gross income also can help with the many tax benefits that phase out at certain levels of AGI.

“An above-the-line deduction directly reduces the amount of income on which tax is calculated, dollar for dollar. Even if you file the ‘short’ 1040A form for non-itemizers, you can take some of these deductions,” Luscombe noted. “Still, there are some you must use the ‘long’ Form 1040 to claim, even if you don’t itemize,” Luscombe added.

Here are deductions and other income-minimizing opportunities available to non-itemizers. The first four are available on both Form 1040 and 1040A:

• Teachers’ classroom expenses – Eligible educators can deduct up to $250 per year for unreimbursed expenses incurred in connection with books, supplies (other than non-athletic supplies for courses in health or physical education), computer equipment and supplementary materials used in the classroom.

• IRA deductions – The maximum deduction per year for an Individual Retirement Account (IRA) is $5,000 for 2008. Individuals 50 and older can make an additional catch-up contribution of up to $1,000. You can still reduce your 2008 taxes through an IRA contribution. Contributions made up to the return due date, without extensions, are treated as made on the last day of 2008.

• Student loan interest – If you qualified for and have paid interest on qualified education loans, you may claim an above-the-line deduction for the interest, up to $2,500. The deduction is phased out for individuals with a modified AGI of more than $50,000, and more than $100,000 for joint filers.

• Tuition and fees – You can take up to $4,000 as an above-the-line deduction for qualifying educational expenses at an accredited post-secondary institution. The deduction is subject to reduction at AGI levels above $65,000 ($130,000 for joint filers) and is not available if AGI exceeds $80,000 ($160,000 for joint filers). This must be coordinated with other educational exclusions and cannot be used if you claim the Hope or Lifetime Learning credits.

These adjustments are available only on Form 1040:

• Expenses for reservists, performing artists, fee-basis government officials – Normally, expenses related to an occupation are taken as itemized deductions or are subtracted from income on a business return, but there are exceptions for these narrow classes. See Form 2106 for details.

• Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs) – You can deduct your contribution to these accounts whether you itemize or not. The deduction for HSAs is taken on line 25. If you have an MSA, you must indicate the deduction by writing in “MSA” and the amount on the dotted line next to line 36.

• Moving expenses – The expenses of a job-related move are deductible even if you don’t itemize. To qualify, your new workplace must be at least 50 miles farther from your old home than was your previous workplace.

• Deductions for the self-employed – If you’re self-employed, you can deduct one-half of your self-employment taxes. You also can deduct the health insurance premiums you paid as a self-employed individual. Self-employed individuals also can deduct their contributions to Keogh, SEP and SIMPLE retirement plans from their gross income.

• Early withdrawal penalties – If you earned interest that you later forfeited because of a premature withdrawal penalty, you can use the loss to reduce your gross income.

• Alimony – Alimony is deductible, including back alimony, in the year when it is actually paid. Amounts that are actually property settlements or child support are normally non-deductible – although different rules apply to pre-1984 divorces.

• Write-in deductions – In addition to the deduction for MSAs, a variety of deductions that apply to only a small number of people are entered on the dotted line next to line 36 of Form 1040 and included in the total. For example, if you signed over a check for jury duty pay to your employer (who paid your normal salary during your jury service), you would claim the deduction here and identify it as “Jury Pay.” A complete list of write-in deductions is in the Form 1040 instructions for line 36.

The Standard Deduction – Plus

No matter what form you use, you can take the standard deduction: $5,450 for single taxpayers, $8,000 for heads of households, $10,900 for joint filers. But for many people, that amount will be augmented. There is an additional amount to be claimed if you or your spouse is blind or was born before January 2, 1944, or both. If you paid state and local real estate taxes, you can pad the standard deduction by up to an additional $500, or $1,000 for joint filers. If you had a net loss in a federally declared disaster area, you can tack that amount on to your standard deduction as well.

The extra amounts for age and blindness can be claimed on Form 1040A. The extra standard deduction amounts for real estate taxes and casualty losses require Form 1040, and the use of a 10-line worksheet in the instructions.

“People used to talk about ‘just taking the standard deduction,’ but the deduction is less ‘standard’ than it used to be and for some taxpayers, taking it can be almost as complicated now as itemizing,” Luscombe observed.

Credits Can Reduce Tax, Boost Income

Dollar-for-dollar, tax credits are more valuable than deductions when it comes to lowering your tax bill. When you reduce your income by a dollar, you may be reducing your taxes by only 15, 28 or 33 cents. When you take a tax credit of a dollar, that’s a full dollar in your pocket instead of Uncle Sam’s.

“You will want to check your calculations carefully, however,” Luscombe noted. “Many credits are calculated based on only a percentage of the out-of-pocket expense, tending to reduce their value in comparison to deductions.”

• Foreign Tax Credit – This is for income taxes paid to a foreign country. See the instructions for Form 1116 for more details.

• Dependent Care Credit – A credit is allowed to an individual who maintains a household for one or more qualifying individuals and who pays child or dependent care expenses enabling the individual to be gainfully employed. The amount of the credit is determined by multiplying the eligible employment-related expense paid during the year by the applicable percentage.

• Credit for the Elderly or Disabled – You can take this credit if you’re 65 or older or are permanently disabled and if your income is lower than certain amounts tied to your filing status.

• Education Credits – Expenses that qualify for the Hope Scholarship Credit and the Lifetime Learning Credit are tuition and required enrollment fees, equipment fees and those course materials that must be purchased directly from the educational institution.

• Retirement Savings Tax Credit – You can get a tax credit of up to $1,000 for contributions to an IRA or a qualified plan, such as a 401(k). The actual amount you get depends on your level of income for the year. To be eligible for this credit, AGI must be $53,000 or less for joint filers, $39,750 or less for heads of households or $26,500 or less for singles. You can’t take the credit if you were born after January 1, 1991, or are claimed as a dependent on another person’s 2008 return or met the definition of “student” given on the 1040 instructions. The credit is in addition to any other deduction or exclusions that applies to retirement savings contributions.

• Child Credit – It may be hard to believe, but some people who qualify for the $1,000-per-child credit don’t take it. But figuring the credit can take a bit of work, with even the simplest situations requiring a worksheet in the Form 1040 instructions and some situations requiring the use of a separate publication, Pub. 972.

• Adoption Credit – You offset your tax by up to $11,390 in qualified adoption expenses per eligible child, including taking the credit for adopting special needs children even if you don’t have expenses. The credit begins to phase out for those with modified AGI over $170,820. It isn’t identified by name on your tax return, though. You take the credit on line 53 of Form 1040, checking the box for “Form 8839.”

• Residential Energy Efficient Property Credit – This is another credit taken on line 53, calculated on Form 5695. It applies to expenses for solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump expenses.

• Other Credits, Including Prior-Year AMT and Hybrid Vehicle – A variety of credits, mainly dealing with business, are taken on line 54 of Form 1040. You have to check a box or write in a form number to identify the credit you’re taking. Check the “Form 8801” box to claim a credit based on prior year alternative minimum tax. (The refundable part of this credit is claimed on line 68.) Write in “Form 8910” to claim the credit for a hybrid vehicle. See the instructions for a complete list of the credits claimed on this line.

• First-time Home Buyer’s Credit – You won’t find this new credit, available only to those who bought homes on or after April 9, 2008, in the section of Form 1040 headed “Tax and Credits.” Look instead under “Payments,” line 69.

Note that only the credit for child and dependent care expenses, credit for the elderly and disabled, education credit, child tax credit and retirement savings contribution credit can be taken on Form 1040A.

Earned Income Credit

The earned income credit has a special place on the tax form. It is refundable; it applies even if the individual owes no tax against which it could be applied. In these cases, a refund is made unless the credit already was collected through an advance arrangement with an employer.

Many people with low incomes are entitled to an earned income credit, even individuals without children. The credit is available to single filers with 2008 adjusted gross incomes of less than $12,880 if there are no dependent children, $33,995 if there is one child and $38,646 if there are two or more children. For joint filers, the amount is $15,880 if there are no dependent children, $36,995 if there is one child and $41,646 if there are two or more children.

The credit focuses on earned income and can be taken regardless of certain non-earned sources of income such as disability pay, pensions or Social Security. Also, individuals and families can qualify if they receive only modest amounts of investment income, rents and interest. The limit for this “disqualified income” for 2008 is $2,950.

Taxpayers with children must fill out Schedule EIC and attach it to Form 1040 or 1040A. Childless taxpayers can use Form 1040EZ to see if they are eligible to claim the credit.

“The IRS will compute the credit for you if you wish,” Luscombe notes. “Oddly enough, a credit designed to help low-income people is one of the most tedious and time-consuming to figure out.”

One Last Chance for a Stimulus Rebate

Most people received a “Recovery Rebate” check from the IRS last year as part of an economic stimulus program. Those checks were based on 2007 income and number of dependents on file with the IRS. If you received less than a $600 rebate check as a single taxpayer or $1,200 as a joint filer, you may be eligible for additional money with this tax return, based on your 2008 income or the addition of a dependent during the year. You claim the additional amount on line 70 of 1040 or line 42 of 1040A, after filling out a worksheet.

“If you received a full rebate last year, don’t bother with this computation, and don’t worry that your check will be taken back even if your income or number of dependents changed in 2008,” Luscombe said.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® TeamMate, CorpSystem®, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com.

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