Are There Limitations on How Much I Can Deduct on My Taxes?
The term "tax deduction" is often thrown blanket-style over three separate tax benefits. An income exclusion -- such as the capital gain on the sale of your principal residence -- is not considered income at all. An income adjustment -- such as moving expenses, money paid for college tuition and health savings account contributions -- lowers your gross income. But more specifically, tax deductions are applied to your return only after you have figured your adjusted gross income by applying the adjustments and income exclusions. Your choice is to take the standard deduction offered by the Internal Revenue Service or to itemize deductions on Schedule A. Knowing the limits to the deductions available on Schedule A may help you make that decision.
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Standard Deduction Amount
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For 2010, the standard deduction amount was $11,400 for married couples filing jointly and $5,700 for singles. There is no reason to itemize your deductions on Schedule A unless your total deductions are greater than the standard deduction. The standard deduction rises if you or your spouse is blind or over 65. Those increased deductions are covered in the IRS instructions for Form 1040A.
Schedule A Deductions
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The deductions on Schedule A are divided into six categories: medical expenses, taxes, interest, gifts to charity, casualty losses and miscellaneous deductions. Each category has different limitations or restrictions.
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Medical Expense Deductions
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The medical expense deduction is limited to only those expenses that exceed 7.5 percent of your adjusted gross income. In general, you can deduct any out-of-pocket medical expenses, including doctor and dentist visits, glasses and hearing aids, prescriptions and insurance premiums for medical, dental and long-term care. The key term is "out-of-pocket." You cannot deduct expenses for which you were reimbursed through your medical insurance. You also cannot deduct over-the-counter medications, even ones recommended by your physician.
Taxes
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There is no ceiling to the deduction on taxes you paid, including state income or sales tax -- you can't deduct both -- and real estate taxes. Some states assess personal property tax, which is deductible, and you also are eligible to deduct the taxes on new motor vehicles. You cannot deduct community association fees or special assessments.
Interest Deductions
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Primarily, the interest deduction applies to interest on home mortgages. There is no limit to the amount of money you can deduct, but there are restrictions on how much of your mortgage -- or mortgages -- can be factored in. For any mortgages begun on a principal or second home -- including home equity loans or second mortgages -- before Oct. 14, 1987, all interest can be deducted. For all other mortgages or home equity loans, your deduction is limited to the interest on $1 million of home acquisition debt. If you have grandfathered debt -- mortgages before Oct. 14, 1987 -- that amount is subtracted from the $1 million debt ceiling. You also may be able to deduct interest from loans to purchase property strictly for investment purposes.
Charitable Deductions
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The baseline limit to your annual deduction for charitable gifts is 30 percent of your adjusted gross income, or AGI. However, many charitable organizations -- such as educational institutions, churches, hospitals and medical research organizations -- qualify as 50 percent-limit groups. You can easily find out if your donation qualifies for the higher limit by checking IRS Publication 78. If your charitable deductions are greater than the amount limited by your AGI, you can carry over the additional contributions to the subsequent year's return.
Casualty Losses
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The deduction allowed on losses because of natural causes, fire or theft is first subject to a $100 deductible for each claim and then is limited to out-of-pocket expenses that exceed 10 percent of your adjusted gross income.
Miscellaneous Deductions
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You can deduct job-related expenses that are not reimbursed -- including safety equipment and work uniforms -- as well as union dues or professional association fees and subscriptions. You also can deduct tax preparation fees and investment expenses, including money paid to a financial adviser and custodial fees for special accounts, such as health savings accounts and trusts. However, the deduction is limited to expenses that exceed 2 percent of your adjusted gross income.
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