Definition of Tax Deduction

Taxpayer can subtract certain items from adjusted gross income

Taxpayers can subtract certain items from adjusted gross income on Form 1040 of the Internal Revenue Service (IRS) income tax return. A tax deduction must appear on Schedule A of the income tax return. A taxpayer prepares Schedule A after determining that total deductions will exceed the IRS standard deduction for taxpayer filing status.

Medical Tax Deductions

Medical bills represent one of five major personal tax deduction categories on Schedule A. One major item in this category is health insurance paid by the taxpayer. Another deductible includes all payments to medical and dental professionals, prescription medicines and payments for assistive devices, such as hearing aids, dentures, glasses, wheelchairs, canes and walkers.

One medical tax deduction is the often-overlooked medical mileage, parking and tolls, meals and medical lodging. Of special note is the fact that the total amount of this category does not represent your tax deduction. Multiply adjusted gross income by 7.5 percent to get a threshold amount. Anything above the threshold becomes your tax deduction.

Deductible Taxes

Taxes you pay on demand are deductible. Such items include annual income tax paid to state, municipal or foreign entities, taxes on real estate, tax on fair value of personal property such as a boat, vehicle, utility or camping trailers, state and local sales tax and excise tax on your car or truck.

Interest Deductions

This interest is the amount you pay for borrowing money. It applies to debts for which you are personally responsible. Under certain conditions, points you pay to secure a mortgage are tax deductible as is interest you pay on investment income.

Conditional interest deductions apply to points paid to secure a mortgage and any other pre-paid interest payments. Only amounts that apply to the current filing year are tax deductible. In some cases, you might be eligible to deduct the entire amount of mortgage points paid. Read the applicable details pertaining to total deduction of points in IRS' "Publication 17."

Charitable Contributions

In the past, this category was subject to taxpayer exploitation. Therefore, the rules for deduction of charitable contributions are tighter. If you intend to make this deduction, a "qualified" organization must be the recipient and you must have proof of the contribution (thank you letter or bank statement).

If you receive any benefit from a contribution, deduct only the amount that does not include the benefit. For example, if the contribution allows you to participate in an event or gives you access to services or merchandise, you cannot take a tax deduction on that portion of the contribution.

Miscellaneous Expenses

This category allows the amount above 2 percent of the taxpayer adjusted gross income to be a tax deduction. The definition of a miscellaneous expense is any un-reimbursed, required employee expenses such as parking fees, uniforms or tools of the trade. Tax preparation fees are also a tax deduction. A complete list of possible expenses in this category appears in IRS' "Publication 17."

References

• Taxes: Tax Deduction - Definition
• Tax Topics: Itemized Deductions