Every year, the Internal Revenue Service (IRS) allows taxpayers to reduce their tax bills by claiming deductions. Deductions help lower your taxable income, enabling you to pay less in taxes. Above-the-line deductions are especially beneficial — they lower your adjusted gross income (AGI).
Your AGI is what the IRS uses to determine whether you can get other tax deductions. If your AGI Is high, either of these two can happen:
That’s why claiming above-the-line deductions is crucial – it can help open doors for other more-valuable tax breaks.
Here’s everything you need to know about above-the-line deductions...
An above-the-line deduction is an amount that may be deducted from gross income on the first page of your tax return before you figure out your adjusted gross income (AGI). This means that above-the-line deductions can reduce your taxable income and ultimately reduce the amount of taxes owed.
Adjusted gross income is the amount of income you have left after certain specific deductions are subtracted. These include alimony paid, contributions to certain individual retirement accounts (IRAs) and other qualified retirement plans, self-employed health insurance premiums, student loan interest, half the self-employment taxes you pay, moving expenses for a job change, or work-related education that qualifies as a work-related expense, and some educator expenses.
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Above-the-line deductions are everything you can deduct before adjusted gross income, while below-the-line deductions are everything you can deduct after adjusted gross income.
For example, you can subtract your contributions to a traditional IRA, self-employed SEP or SIMPLE IRA, and health savings account from your gross income before you calculate adjusted gross income.
So, let's say your gross income is $35,000, your total contribution to a traditional IRA was $5,000 and you are using the standard deduction. Your adjusted gross income would be calculated as follows:
Gross income - contributions = Adjusted Gross Income
$35,000 - 5,000 = $30,000
After you figure out your AGI, you can then claim below-the-line deductions. For example, if your adjusted gross income is $60,000 and you paid $2,500 in interest on a student loan or qualified mortgage interest, then you would subtract this amount from $60,000. Your new adjusted gross income would be $57,500.
It's important to remember that above-the-line deductions can only reduce your AGI on the front page of your tax return, but below-the-line deductions can reduce your taxable income.
You can take an above-the-line deduction whether or not you itemize deductions on your tax return.
Here's a comprehensive list of above-the-line deductions you can claim to lower your tax bill:
Teachers – both in the public and private sector – can deduct up to $250 for educator expenses. And married couples who are both teachers can write off a maximum of $500.
The following are eligible for this deduction:
Expenses include the purchase of books, supplies, equipment (computer, software, paper, etc.), other property used in the classroom, computer equipment (hardware/software), and supplementary materials used by students.
If you move due to a change in your job or business location, the costs of your move are deductible as an adjustment to income. You can deduct any reasonable cost of moving household goods and traveling from your old home to your new home.
But there’s a catch, though: you can only deduct moving expenses for a job if you meet the distance and time tests.
Also, you can't deduct moving expenses for a move back to your former home.
Generally, alimony or separate maintenance payments made under a divorce or separation instrument may be deductible by the payer and must be included in income by the payee.
If you receive alimony, include the amount received in your income.
If you pay alimony, you can claim the amount of alimony paid as an above-the-line deduction against your income.
If you're enrolled in a high deductible health plan (HDHP), then you can contribute to an HSA and reduce your taxable income by the amount contributed. For 2022, an individual with self-only HDHP coverage can contribute up to $3,650 to an HSA account (a slight increase from $3,600 in 2021). And those with family HDHP coverage can contribute up to $7,300 ( an increase from $7,200 in 2021).
Those aged 55 or older can make an additional catch-up contribution of $1,000 for self-only HDHP coverage and $2,000 for family HDHP coverage.
Your contribution remains in your account until you use it. You can withdraw the money at any time to pay or reimburse qualified medical expenses you incur. If you withdraw money from your HSA for any other reason, the amount you withdraw will be taxable and it may also be subject to a penalty.
Note: Avoid commonly missed tax deductions by using a software like Bonsai Tax. Our app will scan your bank and credit card receipts to discover all your potential tax write-offs. Users generally save $5,600 from their tax bill. Try a 14-day free trial today.
You can deduct the amount you pay in interest on student loans for yourself, your spouse, or your dependent. Your loan must have been taken out solely to pay qualified education expenses.
So, who is a dependent? Your dependent is either a qualifying child or a qualifying relative.
Qualifying expenses are the total costs of attending an eligible educational institution, including graduate school. These include tuition, books, fees, supplies, and equipment that were required for enrollment or attendance at the educational institution.
When you're a full-time employee, both you and your employee pay FICA, which is the federal insurance contributions tax (FICA) -- Social Security and Medicare. The IRS automatically deducts Social Security and Medicare payments from your wage throughout the year.
But when you're self-employed, you're required to pay both halves of Social Security and Medicare taxes. Luckily, though, because you can't have half of your self-employment taxes deducted from your paychecks, the IRS allows you to claim a deduction equal to 50% of your Social Security and Medicare taxes. So if you incurred $5,000 in self-employment tax, the IRS will give you a $2,500 credit for this expense.
You can deduct the amount you contribute to your IRA, Roth IRA, SEP-IRA, SIMPLE IRA plan, or simplified employee pension (SEP) plan during the tax year 2022 if you meet certain conditions. For 2022, your maximum deductible contribution is $6,000 ($7,000 if you're age 50 or older).
You can deduct 100% of health insurance premiums if you are self-employed or have a net profit from self-employment.
You can deduct health insurance premiums paid for yourself, your spouse, and your dependents even if you do not claim itemized deductions on Form 1040.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?