5 Top Tax Deductions for Individuals
Don't Miss Out On Deductions That Reduce Your Income Tax Liability
One of the best ways to reduce your income tax liability (and possibly increase your tax refund) is through Federal tax deductions provided by the IRS.
There are certain expenses that are considered tax-deductible, meaning they can be applied toward your gross income and reduce the amount of your taxable income. Knowing what tax deductions you qualify for can help decrease your annual tax liability and, in many cases, garner you a larger tax refund.
Here are 5 tax deductions that individual taxpayers can use to lower their income tax burden:
Deductible State and Local Taxes
State and local taxes that you pay throughout the year may be deductible on your Federal tax return. You can deduct either the state/local income tax that’s withheld from your paychecks or the state/locally-imposed general sales tax on retail items, but not both. If there is no state income tax where you live, the sales tax option would obviously be the one you chose to deduct. However, in states with both income tax and sales tax, you will want to calculate which is the highest, and then use that amount for the deduction on your tax return. The IRS provides a standard sales tax deduction based on your income, or you can keep all your receipts and add up the exact total you paid in sales tax to determine your deduction amount. Keep in mind that sales tax on large ticket items (such as boats, cars, or motorcycles) can be added on to the standard sales tax deduction. These non-business taxes must be claimed as an itemized deduction on Form 1040, Schedule A (Itemized Deductions).
Charitable Contribution Deductions
If you donate money or property to a qualified charitable organization, your contributions may be deductible on your Federal income tax return. As long as you itemize your deductions, you can deduct cash contributions as well as the value of donated items. In most cases, you can up to 50% of your adjusted gross income (AGI). While donating your time is not deductible, any expenses that you pay out-of-pocket may be eligible for the deduction (including gas, cooking ingredients, or postage). Note that any charitable contributions over $250 will require proof, usually in the form of acknowledgment from the charitable organization (such as a receipt). For more information, please refer to IRS Publication 526 (Charitable Contributions).
Deductible Interest Expenses
In general, you cannot deduct personal interest on your income tax return. However, you are allowed to deduct interest that you paid on certain debts (including student loans and home mortgage loans) as long as you are legally liable for the debt. For those with large mortgages or high-interest loans, this can be a big tax savings. In order to deduct mortgage interest, you must itemize your deductions. For more information about the home mortgage interest deduction, please refer to IRS Publication 936. Student loan interest, on the other hand, can be deducted whether you itemize or claim the standard deduction. For more information about the student loan interest deduction, please refer to IRS Publication 970 (Tax Benefits for Education).
Deductible Job Hunting Expenses
If you have been looking for a new job in the same line of work, you may be eligible to claim a tax deduction for some of your job hunting expenses. People who are searching for a job in their present occupation can deduct certain costs — such as résumé creation, transportation, lodging, employment agency fees, and even meals. However, you are not allowed to deduct job hunting expenses if you’re seeking a job for the first time. Job search expenses are categorized as a miscellaneous itemized deduction. For more information about tax-deductible job hunting expenses, please refer to IRS Publication 529 (Miscellaneous Deductions).
Money that’s invested into Individual Retirement Arrangements (IRAs) may be deducted on your tax return, depending on the type of IRA you have. Note that Roth IRA contributions are not tax-deductible. However, you may be eligible to deduct the amount you invest into a Traditional IRA. To claim a tax deduction, there are certain qualifications regarding age, marital status, contribution limits, and whether you have a retirement plan through your employer. Taxpayers who are age 50 or older (in 2014) may be able to deduct up to $6,500. For more information about IRA deduction limits, please refer to IRS Publication 590 (Individual Retirement Arrangements).
Every year, a huge number of people miss out on tax deductions and tax credits that could result in big tax savings. It is usually worth the investment to talk to a professional tax adviser to ensure that you’re claiming all the deductions you qualify for. This can reduce your income tax liability or even increase your tax refund.
For more information about tax deductions for individuals, please refer to IRS Publication 17: Your Federal Income Tax (For Individuals).