Understanding the many tax deductions can be nothing short of a minefield, and many taxpayers are unaware of the many deductions that can be used to legally reduce your tax bill. This article highlights just a few of the tax deductions that you can claim if your circumstances lend themselves.
A standard deduction varies depending on your filing status, age and whether or not you are registered blind. As of 2009, a single individual can claim a standard deduction of $5,700, while the head of the household can claim $8,350. For married couples who file joint tax returns, this rises to $11,400. For married couples who file their tax returns separately, the standard deduction is the same as for a single individual ($5,700).
Married couples who file separately must both claim either a standard deduction or an itemized deduction, meaning that there is no option for one spouse to claim a standard deduction while the other claims an itemized deduction.
In 2009, property owners are able to claim an extra $500-$1000 (with married couples who file joint tax returns qualifying for the higher end of the scale) beyond the basic standard deduction as long as they pay real estate taxes but don’t itemize deductions. These figures are likely to change in subsequent tax years.
If you determine that making itemized deductions will put you in a better financial position, these will need to be listed on Form 1040 Schedule A.
Here are some of the deductions that you may choose to itemize on your tax return.
This type of tax deduction includes the cost of medical care, prescriptions, dental treatments and health care that doesn’t fall into any of those categories. Healthcare costs are only tax deductible if they exceed 7.5% of your Adjusted Gross Income (AGI). For example, an AGI of $20,000 means that your healthcare deduction threshold is $1500 (7.5% of $20,000). If your healthcare expenses come in at $2,500, this leaves you with a total of $1,000 that can be deducted (your healthcare expenses minus your healthcare deduction threshold).
Job expenses are tax deductible if they exceed 2% of your AGI. For example, if your AGI is $20,000, your job expenses deduction threshold is $400. For job expenses of $500, you can deduct $100 (your job expenses minus your job expenses deduction threshold).
Student Loan Interest
If you are still paying back student loans and are earning less than $55,000 (or $115,000 for a married couple who file joint tax returns), you can deduct up to $2,500 to cover interest charges on your student loan repayments. Your lender should send you a Form 1098-E, which detail in box 1 how much interest you have been paying on your student loan repayments. You can then deduct up to $2,500 of this interest as an itemized deduction.
Self employment Taxes
If you’re self employed, you can deduct 50% of your self employment taxes. This should be reported on line 27 of Form 1040.
Donating money to non-profit organizations is tax deductible if the deductions are itemized and the charity has a tax-exempt status. For donations to churches and other religious organizations, the latter requirement is not necessary. If you claim a standard deduction, you cannot claim this type of tax deduction. Keep meticulous written records of all cash donations to charity as the IRS can demand proof of any deductions that you are looking to claim. This can include bank statements or credit card statements (which detail the name of the charity, the date of the transaction and the amount paid) and written confirmation of your donation from the charity itself. This is mandatory for cash donations of $250 or more.
Tax Preparation Deductions
If you use a tax professional to help you complete your tax return, you can deduct the fee for this.
These are not all the deductions available to you. Other deductions not already mentioned above include:
- home mortgage points
- some taxes, e.g., property taxes
- some interest expenses, e.g., home mortgage interest
- 401k, Traditional IRA, and other tax-deferred contributions
- casualty and theft losses
- business use of home and car
- business travel and entertainment expenses
- educational expenses
- casualty, disaster, and theft losses
- other miscellaneous expenses
Due to the overall complexity and variability, it’s a good idea to try both types of deduction before filing tax returns to see which option is more beneficial.
Sally Acquire is a freelance writer on topics relating to personal finance. She wrote this article for Tax Matters Solutions, a Fort Wayne financial services company that helps people with IRS problems, such as those due to unfiled tax returns.