How Much Can I Legally Deduct on My Taxes?
Deductions are a way to reduce your taxable income. This reduces the amount of taxes you owe and increases your income tax refund. Federal taxes offer a variety of deductions, particularly if you itemize deductions. However, the amount of some of those deductions is limited in order to keep them from being abused. These caps may be a fixed amount or a percentage of your income depending on the deduction.
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Itemized Deductions
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The limit on how much your itemized deductions could total expired beginning in 2010. The limitation was based on whether your adjusted gross income was greater than $166,800 for married couples and $83,400 for married couples filing separately. Your itemized deductions could not exceed 30 percent of your adjusted gross income. This limit affected all itemized deductions except medical and dental expenses, casualty and theft losses, gambling losses and investment interest expenses.
Charitable Contributions
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Your charitable contributions can total no more than 50 percent of your adjusted gross income, depending on the type of organizations to which the donations are made. The 50 percent limit applies to churches, educational associations, hospitals and public charities. Donations to all other IRS-approved organizations such as fraternal groups, veterans' organizations and private non-operating foundations (foundations that provide financial support to charities) have a 30-percent limit unless the donation is capital property, then the limit is 20 percent of your adjusted gross income. If there is a question about whether you can deduct donations to specific organization and how much, you should contact the IRS office or the charity. Excess contributions can be carried over for the next five years.
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Rental Losses
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Because renting property is considered a passive activity, the amount of loss you can deduct from your taxes is limited to a $3,000 capital loss, although excess can be carried over. You also need to have income from other passive activities in order to deduct rental loss. The exception to this is if you actively participated in the rental activity. Then you can only deduct up to the at-risk amount, which generally is the amount of money and the adjusted basis of the property that is being rented.
Investment Interest
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Investment interest is the interest you pay on money you borrow to buy an investment property. In order for the interest to be deductible, the property can't produce tax-exempt income. You can generally deduct up to the amount of income that the investment produces. You can carry over any excess interest to use in future years.
Theft and Loss
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If you suffer a casualty or theft loss, you cannot take a dollar-for-dollar deduction of the loss. For losses that were for family or personal use, there are two limits that must be applied. You must subtract $100 from the value of each casualty or theft loss. You then total the remaining amounts and reduce it by 10 percent of your adjusted gross income. What is left is the amount you can deduct.
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References
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