Adjustments to Income Adjustments to income reduces your total income which, in turn, reduces the amount of income tax you will pay. These adjustments reduce income, while tax credits (discussed later) have a far greater value because they reduce tax dollar for dollar.
Educator Expenses
If you are a teacher for grades K-12, instructor, counselor, principle or aide, you can deduct up to $250 per year for out-of-pocket expenses related to your job. To qualify, you must have spent at least 900 hours during a school year as an educator. Amounts spent over and above $250 can be deducted as unreimbursed employee business expenses on Schedule A, subject to the 2% of Adjusted Gross Income limit.
If you are an eBay Education Specialist, you should treat all your expenses as business deductions against your business income. You do this on your business tax return. This will reduce taxable income; and, if you are self-employed or a single-member LLC, this will reduce the amount of income tax you will pay.
Above-the-Line Deduction for Certain Employees
There are additional deductions for certain types of employees that can reduce total income. These employees include government fee basis officials (FBO’s), qualified performing artists (QPA’s) and armed forces reservists. The deductions are too numerous to mention in our workshop today; however, if you feel any of them may apply to you, be sure to ask you tax advisor what you will need to document your expenses to take your allowable deductions. A Form 2106 or 2106-EZ will be required to be filed with your tax return.
Health Savings Account Deduction
An HSA is a savings account set up exclusively for paying the qualified medical expenses. Contributions made by an employer into an individual’s HSA account is not included here; but, are excluded from income and not subject to employment taxes. There are rules and regulations associated with an HSA including, but limited to, being covered under a high deductible health plan and having an account set up with an authorized bank, insurance company or anyone already approved by the IRS.
Moving Expenses
The cost of moving household goods and personal effects (including in-transit or foreign-move storage expenses) and travel expenses (including lodging but not meals) for one trip by the taxpayer and each member of the household. However, the household members do not have to travel together or at the same time. General rules for moving expenses include:
- Distance test
- Time test
- Other considerations including “closely related” in time to the start of work at a new job location
- Armed Forces members on active duty who moves because of a permanent change of station does not have to meet the distance and time tests
One-Half Self-Employment Tax If you file your eBay business as a sole-proprietor or single member LLC, you will be required to pay self-employment tax on the ‘net profit’. As an Adjustment to Income, you will be allowed to deduct from income one-half of the amount of the calculated self-employment tax.
Self-Employed SEP, SIMPLE and Qualified Plans
You can deduct any deductible contributions to a self-employed qualified pension plan, SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match Plan for Employees) plan as a self-employed business owner. Because of all the specific IRS rules and regulations concerning pension plans, please be sure to visit with your tax advisor before taking any deduction on your tax return.
Being successful and making a good profit with your eBay business is your ultimate goal. However, you also need to think about your retirement. If you don’t, who will? One of the best tax savings deductions for anyone is contributing to a pension plan. Be sure to visit with your tax advisor to determine which plan is best suited to your eBay business entity, and then contribute each year to the maximum that you can.
Self-Employed Health Insurance Deduction
There are many rules and regulations surrounding deducting self-employed health insurance premiums from income. The rule generally applies to a self-employed individual (sole-proprietor or single member LLC) but is limited to the ‘net profit’ from your eBay business minus one-half of your self-employment tax and for contributions to your SEP, SIMPLE or qualified plan. Again, we stress visiting with your tax advisor before taking this deduction.
Penalty on Early Withdrawal of Savings
You can deduct any penalty shown on Form 1099-INT (interest) or 1099-OID (original issue discount) for early withdrawal of savings or certificates of deposit.
Alimony Paid
You can deduct from income any alimony paid, but you must also include the recipient’s Social Security number. To be deductible the alimony or separate maintenance payments must be required by a divorce or separation instrument and must meet several other requirements.
IRA Deduction
You can deduct from income any deductible IRA contributions for the tax year for which the tax return is being filed. You do have until the due date of the tax return to make the contributions not including extensions. Because the amount allowed as a deduction is limited by ‘net profit’ from your eBay business, you must complete your Schedule C before calculating your total allowable deduction.
Student Loan Interest Deduction
You can deduct up to $2,500 of interest paid on qualified education loans for college or vocational school expenses. This deduction has a phase out based on modified Adjusted Gross Income must meet several other requirements.
Tuition and Fees Deduction
There is a maximum deduction is $4,000 or $2,000 depending on modified Adjusted Gross Income and also has a phase out requirement. There are also educational tax credits (Hope or Lifetime Learning) related to educational tuition and fees; however, you are not allowed a double benefit for the deduction of educational tuition and fees. The tuition and fees must be paid to an eligible educational institution (accredited college, university, vocational school or other accredited post-secondary educational institution). Be sure to work with your tax advisor to get your maximum tax deduction benefit.
Domestic Production Activities Deduction
The domestic production deduction for 2007 is 6% and must meet several other requirements. Be sure to visit with your tax advisor before taking this deduction.
Total Adjustments
Line 36 of your tax return includes the total adjustments from all the adjustments listed above and include adjustments for various other miscellaneous adjustments that must be identified with a specific code on Line 36 of your tax return. Miscellaneous adjustments include, but are not limited to, Archer MSA deductions (MSA), expenses from the rental of personal property if the income was reported on Line 21 (PPR), jury pay given to employer because employer continued to pay wages while on jury duty (Jury Pay), etc.
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