What Are Tax Deductions?

Deductions and Credits

Tax deductions are one of the few tax topics that generate some excitement. While nobody likes to pay taxes, everybody loves to use deductions to lower their taxes. To put it plainly, a tax deduction lowers your taxable income, which therefore lowers your tax liability. Some people mistakenly think a tax deduction is a direct reduction of taxes owed. That is actually a tax credit, which does directly reduce the amount of taxes owed instead of simply reducing your taxable income.

Tax deductions come in two major flavors: the standard deduction and itemized deductions. The standard deduction is just that—a standard dollar amount set by the IRS each year. This is the easiest deduction to take because there are no calculations to make, no receipts to gather, and no additional tax forms to prepare. While easy, it may not always be the best choice. That’s where itemized deductions come into play.

Itemized tax deductions require a little more work, but it can also mean a big savings on your total tax bill. For example, in 2009 the standard deduction amount for a married couple filing jointly was $11,400. This is a nice deduction, but if you own a home, make contributions to a retirement account, or made charitable contributions the standard deduction may be less than what you could itemize. In situations like this it obviously makes sense to itemize so that you can maximize your total deduction amount. To itemize your deductions you will need to file 1040 Schedule A.

Itemized deductions fall under these primary categories:

  • Medical, dental, prescription drugs, and health care costs
  • State and local income taxes or sales taxes
  • Property taxes
  • Mortgage interest
  • Personal property taxes (such as vehicle registration fees)
  • Interest paid on certain investments
  • Charitable contributions
  • Personal losses due to theft or casualty
  • Job-related expenses
  • Union dues
  • Tax preparation fees
  • Home office expenses
  • Gambling losses

Some Things to Consider

If you do plan on itemizing deductions, there are a few things to consider. First, many deductions are limited to a certain threshold amount. A common example of this is in relation to health care expenses. These expenses are deductible only if they exceed 7.5 percent of your adjusted gross income. So, you may not have enough health expenses to be able to take advantage of the deduction. There are also limitations in effect for higher income earners and if your income is above the threshold for the year they may be reduced.

In addition, itemizing means careful record keeping. You will need to keep all of your receipts and track the expenses you’d like to deduct. In the event of an audit you’d be required to substantiate your deductions, so keeping careful records is crucial.

Comments (11) Leave your comment

  1. I have used TurboTax since 2007. This year my home was sinking and it cost me $24,000 to get the slab raised 3 inches and all the plumbing replaced, Can I deduct this as a loss on my return?

  2. I am paying my husbands court ordered child support out of my income. Because he is awaiting disability and he is a full time student. It is my understanding that if it is deducted from his paycheck it is done with taxes being paid on the amount owed, so that the receiver of support does not pay taxes on the income. If no taxes are being paid do I get a deduction on my taxes as being an expense? I also pay the money judgment that he owes his ex for the house.

  3. To calculate your Adjusted Gross Income, it’s basically your annual salary minus deductions, right or wrong? Are the following consider deductions, these are before tax deductions from my salary
    Monthly before tax deductions:
    NorthShore EPO Plus (health Plan) $136.00
    Fst Commonwlth DMO(dental plan) $15.60
    TDA Reg 403b (retirement plan) $219.24
    TSA CTA (transportation bus pass) $80.00

    And do surgery costs are taken into account into deductions? so let say your annual salary is $36,000. Your adjusted gross income (AGI) would be $36,000 minus all deductions for the year. So the deductions would ($136*12 +15.60*12+$219.24*12 +$80*12 + cost of surgery) or is that not AGI?

  4. @Craig: no HOA fees do not qualify as itemized deductions.

    @Kathleen: no rent payments not deductible.

    @Delores: Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. If the trip is for pleasure then it cannot be deducted even if you are a travel agent. For more info see irs website http://www.irs.gov/taxtopics/tc511.html

    @John: I am not a fortune teller but there are other energy credits available right now for solar purchases such as solar hot water heaters.

    @Randy: Probably not a deduction, you might be able to argue they are a charity donation but you are not giving the equipment to the city.

    Cort Arlint

  5. I have turbo tax deluxe that I am using and I am almost through. I have to pay taxes and from what I have seen My wife and I could purchase a Roth IRA and reduce our taxable income by the amount of the IRA, we should be able to purchase $5000 with the chance for the additional $1000. We are married filing jointly.

    Thanks

  6. I am a volunteer with search and rescue. Where do I deduct all the gear (that the county does not provide) to perform my duties I purchased over the past year?

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