Adjustments to income allow you to reduce the income that is subject to tax, whether you itemize or take the standard deduction. Allowable adjustments for 1990 are the same as for 1989, except the new deduction for one-half of self-employment tax.
The IRA Deduction
If you are not covered by a qualified employer, including self-employed, retirement plan such as a qualified pension, profit-sharing, stock bonus plan or an SEP, but have earned income, you may make a deductible contribution to an IRA. On a joint return, neither spouse is eligible if either spouse is covered by such a plan.
If you are covered by a qualified employer retirement plan, you may still make a contribution to an IRA, up to the $2,000 ceiling, but it may not be deductible if your adjusted gross income exceeds specific limits. A single, head of household or married filing separately if living apart from your spouse taxpayer is eligible for the full IRA deduction if AGI is no greater than $25,000; a partial deduction if AGI is less than $35,000; and no deduction if AGI is $35,000 or more. The comparable AGI phaseout levels for a joint filer are $40,000 and $50,000.
If you live with your spouse but are filing separately, the deduction phases out for AGI between zero and $10,000. The booklet -- see Section 4, instructions for line 24 -- contains work sheets and additional instructions to help you figure the amount you can deduct.
If you make contributions that are not fully deductible, use IRS Form 8606 and keep track of all your nondeductible contributions so that when you withdraw funds from your IRA, the amount attributable to these contributions will not be subject to tax.
Self-employed individuals may deduct one-half of their self-employment taxes for income tax purposes. Use Schedule SE to calculate the self-employment tax, and include on line 25, Form 1040 one-half of the tax shown on line 10, Schedule SE.
If you're self-employed, you may deduct, on line 26, Form 1040, 25 percent of the cost of health insurance for yourself and your family -- provided neither you nor your spouse were eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer. The deduction may not exceed your net income from self-employment.
Early CD Withdrawal
If you withdrew funds from a time savings deposit, such as a certificate of deposit, before maturity, you may have been assessed a penalty for early withdrawal. Form 1099-INT or 1099-OID should show this as a separate item. Do not subtract the penalty from the earned interest. Instead, report the full amount of the interest income on line 8a, Form 1040, and enter the amount of the penalty on line 28 of Form 1040.
Alimony Payments Alimony included in the recipient's income on line 11 of Form 1040 may be deducted by the payer on line 29, Form 1040. If alimony is deducted, show the recipient's Social Security number next to line 29.