How to Deduct Federal Income Tax
Deduction. The very word is music to the ears of millions of taxpayers seeking to reduce their taxable incomes by any legitimate (and even some not-so-legitimate) means possible. This article shows you when and how to claim various types of expenses that you can subtract from your gross income.
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Instructions
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Learn the different types of deductions. All tax deductions fall into one of two categories: Above the line deductions, which are considered deductions FOR Adjusted Gross Income, and below the line, or itemized Deductions, which are deductions FROM Adjusted Gross Income. The latter type of deduction is always reported on Schedule A and its supporting forms and worksheets.
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Enter your income from all sources on the first part of the form or program. If you are self-employed, you must complete Schedule C at this point to determine your net income from self-employment activities. This means that you must deduct all of your business-related expenses, such as wages, supplies, depreciation, insurance, utilities and overhead, equipment and other expenses listed on the Schedule C and its supporting forms. This is the first place that you will deduct work-related expenses. You will deduct similar related expenses for rental or royalty income on Schedule E and its supporting forms.
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Gather all of your above the line deductions. Begin listing them on the appropriate line on the 1040 or in the program. These deductions include moving expenses, capital losses, business losses, student loan interest, alimony paid, non-reimbursed educator expenses, IRA and health savings account contributions and non-reimbursed educator expenses, and other miscellaneous deductions. The total subtractions will leave you with your Adjusted Gross Income.
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Flip the Form 1040 over and subtract your personal and dependency exemptions. Write the remainder on line 39 of the 2008 1040. Be sure to add any additional exemptions if you are blind or over age 65.
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Total your itemized deductions using Schedule A and its supporting forms. These include real estate, personal property and state income taxes, mortgage interest and points paid, charitable contributions, non-reimbursed work and medical expenses and casualty losses above certain amounts and miscellaneous deductions, such as investment expenses. These constitute the last set of deductions you will enter on your tax return.
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Tips & Warnings
Do not confuse deductions with tax credits, which reduce the actual amount of tax you owe dollar for dollar on the bottom line.
This article is intended to be purely educational in nature and should not be construed as tax or financial advice. For more information, visit the IRS website or consult your tax or financial adviser.
