Above the Line Deductions
An above the line deduction is an amount you can claim on your taxes that reduces how much tax you’ll owe. You can claim above the line deductions whether or not you choose to itemize your deductions.
Some examples of above the line deductions are educator expenses, student loan interest deduction, contributions to a health savings account, and amounts paid for tuition and fees.
You can claim above the line deductions by completing Schedule 1 and attaching it to your federal income tax return.
Adjusted Gross Income (AGI)
Your adjusted gross income (AGI) is your taxable income minus certain deductions. It’s a significant number because the IRS uses your AGI to calculate if you qualify for other tax credits or deductions.
Also, the IRS may ask you to provide last year’s AGI to file your tax return electronically.
Below Line Deductions
Below the line deductions are amounts you can claim to reduce your overall taxes. Generally, there are two types of below the line deductions, including itemized deductions and the standard deduction. However many people do not typically refer to the standard deduction as a below the line deduction. You can choose the deduction that lowers your tax bill the most.
A capital gain occurs when you sell a capital asset, such as real estate, stocks, or bonds, for more than you paid for it. The amount of taxes you pay depends on how long you hold your capital asset.
If you hold your capital asset for less than one year, your gains are taxed at ordinary income tax rates up to 37% for 2022. If you hold your capital asset longer than a year, your gains are taxed at capital gain tax rates, which are lower. For 2022, the top capital gain tax rate is 20%.
You may incur a capital loss when you sell an asset for less than you paid for it. For example, if you purchase stock for $2,000 in 2018 and sell it for $1,500 in 2021, your capital loss is $500.
When your total capital losses exceed your capital gains in a year, you can claim a total loss up to $3,000 to reduce your taxable income. The IRS allows you to claim any unused losses in the following tax years.
Child and Dependent Care Credit
The child and dependent care credit is a tax credit available to families who pay for the care of a loved one while working, or looking for work.
The amount of the credit is a percentage of how much you paid for care up to a maximum amount. For 2022, you can claim expenses up to $4,000 for one qualifying person and up to $8,000 for two or more people.
A qualifying person must meet one of the following requirements:
- Your dependent under the age of 13
- Your spouse or dependent who is unable to care for themselves and lives with you more than half of the year
Child Tax Credit
The child tax credit provides a financial benefit to families with qualifying children. For the 2021 tax year, the IRS allows you to claim up to $3,600 per child under 6 ($3,000 per child ages 6 to 17). The credit lowers the amount you owe in taxes and is fully refundable, which means you can expect a tax refund even if you do not owe taxes.
Your child must meet the following qualifications to claim the credit:
- You must claim your child as a dependent on your tax return and they’re related to you
- Your child must be 17 or younger and a U.S. citizen, national or resident alien
- Your child must have a valid Social Security number and live with you for at least half of the year
- You must provide at least half of their financial support
The cost basis is the original amount paid for an asset. For example, if you buy stock at $1,000 on Jan. 1, 2021, the original cost of $1,000 is your cost basis.
Cryptocurrency Tax Rate
Generally, the IRS taxes cryptocurrency similar to capital gains. Therefore, how much you’ll pay in taxes on your crypto depends on how long you hold the cryptocurrency before you sell or use it. If you hold it for more than one year, any gains are taxed at the capital gain rate, up to 20% for 2022. Otherwise, if you hold it for one year or less, your gains are taxed at ordinary income tax rates up to 37% for 2022.
A dependent is someone who relies on the taxpayer for financial support. For tax purposes, the IRS allows you to claim a dependent, which may entitle you to tax breaks.
Estimated Tax Payments
You must pay federal income taxes when you receive income throughout the year. Typically, if you’re an employee, your employer will withhold federal income taxes and pay taxes on your behalf. However, if you own a business, you must make estimated tax payments throughout the year.
Here are the due dates for the 2022 estimated tax payments:
2022 Estimated Tax Payment Due Dates
|For the period||Due Date|
|First Quarter||Jan. 1 to March 31||April 15, 2022|
|Second Quarter||April 1 to May 31||June 15, 2022|
|Third Quarter||June 1 to Aug 31||Sept. 15, 2022|
|Fourth Quarter||Sept. 1 to Dec. 31||Jan. 17, 2023*|
Earned Income Tax Credit (EITC)
The earned income tax credit (EITC) is designed to provide financial assistance to taxpayers who earn a low to moderate-income (defined up to $57,414 for 2021). The EITC is a refundable tax credit, which means it can reduce the amount of taxes you owe and generate a refund.
The EITC is based on a percentage of income that you’ve earned during the year, including wages, tip income, and self-employment income. However, unemployment income, alimony, child support, or interest aren’t considered earned income.
For 2021’s EITC, you can claim up to $1,502 if you don’t have children and up to $6,728 with three or more qualifying children.
Your filing status is an IRS classification based generally on your marital status. It is used for your filing requirements, standard deduction, ability to claim certain tax breaks and the amount of your tax. There are five filing statuses:
- Head of Household
- Married filing separately
- Married filing jointly
- Qualifying Widower
Interest deduction causes a reduction in taxable income. If a taxpayer or business pays interest, in certain cases the interest may be deducted from income subject to tax. Some examples of interest payments that can be deducted are interest payments for a home mortgage or home equity loan, margin account interest, and student loan interest.
An investment interest expense is any amount of interest that is paid on loan proceeds used to purchase investments or securities. Investment interest expenses include margin interest used to leverage securities in a brokerage account and interest on a loan used to buy property held for investment. An investment interest expense is deductible in certain circumstances.
Itemized deductions are expenses you can claim on your federal income tax return to lower your taxes. Some examples are medical and dental costs, charitable donations, state income taxes and casualty losses. When choosing whether to itemize your deductions, or go with the standard deduction, use whichever is the higher amount.
Long-Term Capital Gains Tax
Long-term capital gains are derived from assets that are held for more than one year before they are disposed of. Long-term capital gains are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%. The tax rate on most taxpayers who report long-term capital gains is 15% or lower.
Margin interest is the interest that is due on loans made between you and your broker concerning your portfolio's assets. For instance, if you short sell a stock, you must first borrow it on margin and then sell it to a buyer. Or, if you purchase on margin, you will be offered the ability to leverage your money to purchase more shares than the cash you outlay.
Nontaxable income is any income you receive on which you don’t have to pay taxes. Some examples of nontaxable income are child support payments, gifts, and cash rebates.
Ordinary, or non-qualified, dividends are a share of a company's profits passed on to the shareholders periodically. The dividends are taxed as ordinary income.
A personal exemption was a dollar amount you could deduct from your taxable income, which would reduce your taxable income. However, from 2018 through 2025, the personal exemption doesn’t apply due to tax law changes by the Tax Cuts and Jobs Act (TCJA).
Before the TCJA, the 2017 personal exemption amount was $4,050, which taxpayers could claim for themselves, dependents and their spouses.
A qualified dividend is a dividend that must meet special requirements put in place by the IRS, and falls under capital gains tax rates of 20%, 15%, or 0%, depending on the tax bracket. These rates are lower than the income tax rates on unqualified or ordinary dividends, which are taxed at standard federal income tax rates. Because of this discrepancy in rate, the difference between ordinary vs. qualified dividends can be substantial when it comes time to pay taxes.
Self-employment income is money or property received for services you provide. Typically, a self-employed person is a sole proprietor, freelancer, or independent contractor.
A sole proprietor is someone who owns a business by themselves. They report their share of income and expenses on Form 1040, Schedule C.
Short-Term Capital Gains Tax
A short-term gain is a profit realized from the sale of personal or investment property that has been held for one year or less. The amount of the short-term gain is the difference between the basis of the capital asset–or the purchase price–and the sale price received for selling it. Short-term gains are taxed at the taxpayer's top marginal tax rate or regular income tax bracket, which can range from 10% to as high as 37%.
A standard deduction is a flat amount that the IRS allows you to reduce your taxes based on your filing status. The IRS allows you to choose between deducting your itemized deductions or the applicable standard deduction. Choose the deduction method which lowers your tax bill the most.
2021 Standard Deduction
|Single and Married Filing Separately||$12,550|
|Married Filing Joint and Qualifying Widow(er)||$25,100|
|Head of Household||$18,800|
2022 Standard Deduction
|Single and Married Filing Separately||$12,950|
|Married Filing Joint and Qualifying Widow(er)||$25,900|
|Head of Household||$19,400|
A tax deduction is an amount that reduces the amount of your income that can be taxed, lowering your tax bill. Examples of tax deductions are standard deductions, itemized deductions, or above the line deductions.
Taxable Interest Income
Taxable interest is interest on bonds, mutual funds, CDs, and demand deposits of $10 or more. Taxable interest is taxed just like ordinary income.