Allowable & Non-Allowable Deductions in Personal Taxes
The IRS permits taxpayers to deduct a wide range of expenses from personal taxes. However, unless the tax law specifically allows for the deduction, you should assume the expense is not deductible. For expenses that tend to cause confusion among taxpayers, the IRS publishes a list of expenses that are specifically not deductible. Remember, a tax deduction is not a right; it's a privilege that only the government can allow.
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Student Loan Interest
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When you begin repaying student loans after graduation, the federal government attempts to reduce your financial burden of educating yourself by allowing a deduction for the interest you pay on the student loan. This type of deduction is an adjustment to your income to arrive at your adjusted gross income. The significance of this is that the deduction is available to all taxpayers, regardless of whether you elect to itemize your expenses or just claim the standard deduction. The IRS does impose some limitations each year on the total interest payments you can deduct. In addition, the IRS also provides income thresholds, which, if you exceed them, the student loan interest deduction is no longer allowable.
Home Mortgage Interest
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The mortgage you obtain to purchase a personal residence also requires you to make interest payments on the amount you borrow. As a way to stimulate economic growth and encourage Americans to purchase their homes, the IRS allows you to claim a deduction for the interest portion of your mortgage payments. The federal government imposes a fairly high limit on the amount of interest you can deduct each year. As long as the combined total of your outstanding mortgage balances don't exceed $1 million, and you use those mortgages to purchase up to two personal homes, then you can fully deduct your annual interest payments.
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Tax-Exempt Income Expenses
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One of the fundamental rules inherent in the Internal Revenue Code is that you can deduct the reasonable expenses you incur that relate to taxable income it helps generate. There are, however, many tax-exempt investments you can purchase, such as municipal bonds, for which no expense deductions are allowable. For example, if you borrow money to purchase the municipal bonds, you cannot deduct the interest as you repay the loan. Since you don't pay tax on the income, the expense is not deductible.
Travel for Others
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When you go on business trips for the benefit of your employer, the expenses you incur and don't receive reimbursement for are a deductible work-related travel expense. However, even if the trip keeps you away from home longer than you want, you can never claim a deduction for the travel expenses you pay to take a friend or family member with you. Since your travel companion has no relation to your job, their travel costs don't qualify as a work-related expense.
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Comments
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We are relocating to Australia in Jan 2012.Are out relocaton fees, flights, shipment tax deductable? please advise.
