What Items Can Be Deducted for Federal Income Tax?
The amount of income tax you pay is calculated based on the income that you earn. However, a variety of expenses may be deducted from that income before the tax is calculated. Finding the most possible deductions can reduce the amount of tax you owe or generate a larger refund. Most deductions have specific requirements and/or limits, though. It is important to find out if you qualify and how much you are allowed to deduct.
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1040 Deductions
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Some deductions are known as "above the line" deductions, which means you can take them regardless of whether you choose to itemize or claim the standard deduction. Some education expenses may be deducted here, including post-secondary tuition and student loan interest. You may also deduct contributions to your health savings account or your IRA.
Standard Deduction
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Most taxpayers are entitled to a minimum deduction, called the standard deduction. You cannot claim the standard deduction if you itemize (or if your spouse itemized on a separate return). You may add up your itemized deductions first and determine which amount is greater before choosing to take your standard or itemized deductions. Your standard deduction varies from year to year, based on inflation and your filing status, and can be increased if you are blind or at least 65 years old.
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Itemized Deductions
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Use 1040 Schedule A to calculate your itemized deductions. Medical expenses can be listed here if your out-of-pocket costs were more than 7.5 percent of your adjusted gross income, which is your income less your 1040 deductions. You can deduct taxes paid on your personal property, including your home and car, as well as mortgage interest and insurance. You have the option of deducting either state income taxes you paid or your state sales tax expense. Contributions you made to charity may also be deducted on this form.
Exemptions
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Most taxpayers are also permitted to deduct an amount for personal exemptions. For 2010, this was $3,650 for yourself and your spouse, if married, and for any dependents, but the amount can change every year -- find the up-to-date number in the personal exemptions link in the Resources section. This deduction is limited to once per person, so you cannot take it for yourself (or your spouse) if someone else claims either of you as a dependent.
Credits
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After your income has been reduced by allowable deductions and you figure your tax owed, you may deduct some credits. Credits are available for each of your children and for child care expenses. There are also credits for education and retirement savings contributions. Credits directly reduce the amount of your tax, not just the income that is taxed, and can provide valuable tax savings.
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