Once you have cut down your taxable income or the AGI through adjustments, it is the time to downsize your AGI even more through Deductions. Deductions can change the face of your tax return, totally. It can create a huge difference between your AGI and the Taxable income.
The IRS describes two types of deductions: Standard and Itemized Deductions. A taxpayer can take either of the two and not both at the same time. Generally everyone chooses the higher one.
Standard Deductions: It is specific amount of deduction available to every taxpayer depending on one’s filing status and age. The IRS updates the amount of Standard deduction every year. Extra deduction is available to people above 65 years of age and the disabled. If the taxpayer is filing as MFS and the spouse is itemizing the deductions then the taxpayer cannot take standard deduction.
Itemized Deduction:
If your itemized deductions are more than the standard deduction amount then you can opt for the itemized deductions. Itemized deductions are available for some of the expenses you incurred during the assessment year. The qualifying expenses are:
1. Medical and Dental Expenses: Medical Expenses incurred by you, your spouse or your dependent and unreimbursed by insurance in the year are deductible in your tax return. Expenses related to funeral, burial, cosmetic surgery, meals and travelling expenses incurred during the treatment, diet food and insurance premiums paid by your employer are not deductible in you return. Most of the other health care expenses are deductible.
2. Taxes that you had paid: State, local, foreign and personal property taxes that you paid are also deductible. Taxes that are not deductible are federal income tax, social security tax, stamps, transfer of property, estate tax, and water and sewer tax.
3. Interest you paid: Home mortgage interest and investment interest paid during the year are deductible on your return. Home mortgage points and refinance points are also deductible. Interest on business or rental property and on personal loans is not deductible.
4. Gifts to Charity: Charitable contributions, cash or kind, made to qualifying organizations are deductible. The deduction is allowed only up to 50% of your AGI for that particular year. For non cash contributions, the fair market value is calculated for deduction.
5. Casualty and Theft Loss: Loss from unexpected damage or harm to property from any event is a deductible loss. Event can be theft or natural calamity or unforeseen accidents.
6. Job Expenses: Job related expenses which include travel expenses, vehicle expenses, business of home, related educational expenses and other job expense is deductible on your return. If the employer has reimbursed the expenses then the unreimbursed amount can be deducted.
7. Miscellaneous Deductions: This includes investment expenses like fees paid to the broking firm, depreciation, legal fees, tax and investment advice fee, safe deposit and many such expenses.
Deductions are the best way to curtail your income subject to tax. You can choose the best possible option to spend in and then reduce your tax responsibility.
