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Types Of Tax Deductions

An Overview of Tax Deductions & How to Claim Them on Your Return

With the ever-changing tax laws and the temporary nature of most tax credits and deductions, timing is critical when it comes to claiming anything on your income tax return. To make the most of the available benefits, taxpayers often choose to defer their income and accelerate their tax deductions.

Tax deductions lower your taxable income, and they are calculated using the percentage of your marginal tax bracket. For example, if you are in the 24% tax bracket, a $1,000 tax deduction saves you $240 in tax (0.25 x $1,000 = $250).

As you prepare your income tax return, you must decide between taking the standard deduction or itemizing deductions. You should use whichever tax deduction benefits you the most.

The Standard Deduction

The standard deduction is a dollar amount that reduces your taxable income. It is usually adjusted for inflation every year. Your standard deduction amount is based on your filing status, and it is subtracted from your AGI (adjusted gross income).

For the year 2018, the standard deduction is as follows:

  • $12,000 for single filers
  • $24,000 for married couples filing a joint return
  • $12,000 for married couples filing separate returns
  • $18,000 for head of household filers
  • $24,000 for qualifying widows/widowers

An additional standard deduction for the elderly (over 65) or visually impaired is as follows:

  • $1,600 for single or head of household filers
  • $1,300 for married filers

The standard deduction can be claimed on your individual income tax return (Form 1040).

RELATED: 2018 Federal Tax Rates, Personal Exemptions, and Standard Deductions

Itemized Deductions

If you do not qualify for the standard deduction, you may choose to itemize your deductions instead. A taxpayer will also typically itemize deductions if it offers them more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction).

Certain itemized deductions are based on a minimum (or “floor”) amount. This means that you can only deduct amounts that exceed the specified “floor.” However, there is no longer an income limit for taxpayers who itemize.

If you paid for any of the following items during the tax year, you may be able to use them to claim an itemized deduction:

  • Medical and dental expenses
  • Deductible taxes
  • Home mortgage points
  • Interest expenses
  • Charitable contributions
  • Business use of your home or car
  • Business travel expenses
  • Work-related education expenses
  • Casualty, disaster, and theft losses

If you decide to itemize your deductions, it is important to keep detailed records of those tax deductions – including documentation for medical expenses, charitable donations, interest expenses, and business expenses. You should use IRS Tax Schedule A (Form 1040) to figure your itemized deductions, and file it with your 1040 tax return.

Here are links to the IRS tax forms for calculating and reporting your itemized deductions:

RELATED: The Standard Deduction vs. Itemized Deductions

Above-the-Line Deductions

Above-the-line tax deductions are taken before your AGI is calculated (instead of after, like the other deductions). Because of this, many believe this type of tax deduction to be more advantageous to taxpayers. Above-the-line deductions are subtracted from your gross income, and the resulting number is your AGI.

These tax deductions apply whether you itemize or not. They were designed to help protect your personal exemptions and itemized deductions from phase-outs.

Some above-the-line deductions include the following:

  • Student loan interest
  • Certain business expenses
  • Alimony
  • Half of self-employment tax
  • Contributions to a qualified retirement account (e.g. traditional IRA)
  • Contributions to a Health Savings Account (HSA)
  • Early withdrawal penalties for CDs and savings accounts
  • Moving expenses for members of the U.S. military

RELATED: How to Determine Your Income Tax Bracket


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