Federal tax law allows you to deduct several different personal expenses from your taxable income each year. This can actually pay off during tax season because reducing taxable income reduces the amount of income that is subject to federal income tax. However, not all of the expenses you incur will provide you with tax savings; the Internal Revenue Code is very specific about the types of expenses you can deduct and the taxpayers who can claim them. Alternatively, taxpayers can choose to report itemized deductions.
ITEMIZED DEDUCTIONS are specific types of expenses incurred by the taxpayer that can reduce taxable income. The types of itemized deductions include mortgage interest, state or local income taxes, property taxes, medical or dental expenses that exceed AGI limits, or charitable donations. Personal property taxes, which include real estate taxes, are deductible along with state and local taxes that were assessed the previous year. When you file your taxes each year, you have the option of taking the standard deduction or itemizing your deductions.
There are times when the additional deduction made for excess medical or work-related expenses will allow the itemized deductions to exceed the standard deduction. Because you don't have as many expenses to deduct, the standard deduction offers much greater tax relief than the itemized deduction. The standard deduction is a pre-established amount that you are allowed to deduct from your taxable income each year. When the itemized deductions have been subtracted from your income, the rest will be your actual taxable income.
Most of the deductions below the line relate to expenses that you detail in Schedule A attached to your personal income tax return. Many people don't know what tax deductions are available or how to claim them on their tax returns. Simply put, a tax deduction is an expense or expense that can be subtracted from your income to reduce the amount you pay in taxes. Detailing your deductions requires more work.
You'll need to list all the deductions you want to claim one by one. To get the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.