Income Tax Deductions The Most Common Ones
Common income Tax Deductions
We have written before about the importance of income tax deductions. After all, deductions are an important factor in determining how much you are going to pay in income taxes. The more deductions you can take, the lower your taxable income and thus, the lower your income taxes. While there are hundreds, and perhaps thousands, of legitimate deductions that taxpayers may use to lower their income tax bill, most people make use of only a handful of them. In a recent post, we wrote about some unusual income tax deductions that people have used over the years, and now we’ll turn the tables a bit and focus on some of the most common deductions that American taxpayers take. Income Tax Deductions The Most Common Ones
Charitable Donations – Americans remain a charitable lot, giving money to churches and nonprofits on a regular basis. These donations, whether in the form of cash or goods, are legitimate income tax deductions, though it’s advisable to keep accurate records of your donations. If you regularly write a check to your church, be sure to make note of it. If you donate used goods to a charity, be sure to get a receipt or document the donation in some other way. Income Tax Deductions The Most Common Ones
State and local income taxes – State income taxes paid in the previous year is deductible from the current year’s income. If you live in one of the seven states that have no state income tax, you may deduct any sales tax that you paid during the year. Be sure to keep records for this, which, we admit, could be a bit of a bother. Still, if you’re willing to keep every receipt during the course of the year, the sales tax could add up to a sizable deduction.
Real Estate and Personal property taxes – Taxes on personal property as well as real estate taxes are deductible. These will often be spelled out on an end-of-year statement from your mortgage company. If you don’t have a mortgage, you’ll likely have documentation from your local taxing authority.
Medical and Dental Expenses – Medical and dental expenses that are not covered by insurance are deductible from your income, though the amount will vary depending on your date of birth. Income Tax Deductions The Most Common Ones
Mortgage Interest and Points – To spur investment in homes and to increase overall home ownership, the IRS permits homeowners to deduct mortgage interest on loans of up to $1 million. This applies to both first and second mortgages, and this deduction can be quite valuable, especially if you bought your home fairly recently, as mortgage interest as a percentage of the monthly payment is highest early in the repayment schedule. In addition, points paid to lower the interest rate on a mortgage are also deductible. Points on a new mortgage are fully deductible in the first year, but points for a refinance loan must be deducted over the life of the loan. The mortgage interest deduction is one of the few places in US tax law that favors the lower and middle class over the wealthy, as the $1 million cap means that those buying mansions are generally unable to deduct their mortgage interest costs. Income Tax Deductions The Most Common Ones
Teacher/Educator Expenses – The government understands that educators often have to dip into their own pockets to buy school supplies, so the law permits deduction of up to $250 in out-of-pocket expenses annually. Be sure to keep receipts. Income Tax Deductions The Most Common Ones
Self-Employment expenses – Health insurance costs and a portion of the self-employment tax are deductible for those who work for themselves. In addition, home office expenses are deductible, based on the percentage of the home used for the business. This might include a portion of the mortgage payment, utility costs, and insurance.
Education costs – Interest on student loans, whether private or public, are tax deductible. Tuition and related fees may also be deductible. Certain tax credits may also be available for students; these may be offset by deductions, so be sure to inquire when filing your tax return.
Job-hunting expenses – In the recent economic downturn, this one became rather important. If you’re looking for a job and you incur expenses such as food and lodging, travel, or printing business cards or resumes, you may be allowed to deduct these costs if they exceed a certain threshold of your adjusted gross income. With the economy returning to a more “normal” state, the use of this deduction is likely going to be on the wane, but if it applies to you, then you should, by all means, make use of it. Income Tax Deductions The Most Common Ones
Health Savings Account Contributions – The amount that you contribute to a health savings account is deductible, subject to certain qualifications (employer contributions, for example, are not deductible.) For more information on these income tax deductions, you can visit the site at Treasury.gov.
Retirement plans – Contributions to some retirement account plans are tax-deductible, such as those invested in a traditional Individual Retirement Account. This money is taxed at the time of withdrawal but is deductible at the time of the contribution. Roth IRA contributions do not apply, as those are made with post-tax money and the distributions taken at retirement are not taxable. Income Tax Deductions The Most Common Ones
Income Tax Deductions – Summary
As we have pointed out before, these are but a few of the hundreds (or even thousands; no one knows) of income tax deductions that are allowed by taxpayers under the US Tax Code. While most people are familiar with the common ones listed above, many others are quite obscure or only apply under specific circumstances. That doesn’t make them any less useful or any less desirable and it would benefit any taxpayer to find out about all of the deductions that are available to them. Some of them may be relatively small, but over time, they do accumulate and this could add up to a sizable reduction in the amount that you pay on your income taxes. Income Tax Deductions The Most Common Ones
Every little bit helps and the more deductions you can take, the less you’ll pay on maximizing taxes.