Deductive Reasoning: How to Get the Most From Tax Deductions

You know the drill -- find as many deductions as you can to lower your taxable income. Lower taxable income means lower tax.

But the vast majority of deductions (including the big ones for mortgage interest and state taxes) are available only to taxpayers who itemize. And it only pays to itemize if your itemized deductions in aggregate amount to more than the freebie standard deduction that anyone can take.

For 2002 returns the standard deductions are:

• $4,700 for single filers;

• $7,850 for married couples filing jointly;

• $6,900 for head of household filers;

• $3,925 for married couples filing separately.

There are a number of deductions that anyone can take, though, whether itemizing or not. Because the spot to claim these deductions are higher up on the Form 1040 than the line for itemized deductions, they're referred to as "above the line" deductions. You can't claim these on a 1040EZ, though, so it pays to take a look at Form 1040A (which allows for 11 above-the-line deductions) or the standard Form 1040 (which allows twice the opportunity for deductions of this kind). Make sure that by filling out the simplest 1040EZ you're not forgoing any potential breaks.

To that end, here's a rundown of some of the most easily attainable above-the-line deductions to keep an eye out for.

Higher education expenses. This one's new for 2002 -- taxpayers can deduct up to $3,000 in college tuition and related expenses, so long as their income is $65,000 or less if single, $130,000 or less if married filing jointly.

Student loan interest. There's a new twist on this (somewhat) old favorite. You can deduct up to $2,500 in interest paid on federal student loans. When this deduction was created in 1997, there was a limit of 60 months -- you could only claim the deduction for the first 60 months of the loan repayment period. Now, though, the deduction is available for the life of the loan, provided you meet the income requirements -- the full deduction is available for single taxpayers with less than $50,000 in adjusted gross income (or AGI), married couples with less than $100,000. The deduction phases out completely when singles hit $65,000 and married couples hit $130,000.