The Most Practical Reasons Why You Need To Organize Your Tax Deductions

What Are Tax Deductions?

Tax Deductions are expenditures that will reduce your taxable income. There are two kinds of tax deductions: adjustments to income and itemized tax deductions. The adjustments to income are the better of the two, as they reduce adjusted gross income, or “AGI” and your taxable income. Itemized tax deductions reduce your taxable income only.

Adjustments To Income

First, we will look at some adjustments to income.

Educator expenses apply to K – 12th grade educators, and are limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized tax deduction.

A health savings account is an account set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse or dependents.

Moving expenses include qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses. Moving expenses are reported on Form 3903 .

Self-employment tax. If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax.

Self-employed pension plans. You can deduct all qualified contributions to self-employed SEP, SIMPLE, and qualified plans.

Self-employed health insurance tax deduction. For this tax deduction you must be a sole proprietor or an active partner with net business income or a more than 2% shareholder of an S-corporation. The tax deduction is limited to net profit. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings is tax deductible and you will find this fee on your form 1099-INT. These penalties are typically incurred when you cash in a CD prematurely.

Alimony paid is deductible, but you must include the Social Security number of the recipient.

IRA deduction. Report only deductible traditional IRA contributions. Roth IRA contributions are not tax deductible.

Student loan interest. Up to $2,500 of the interest paid on a qualified student loan is tax deductible. There are income limitations. You will receive Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees tax deduction. Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.

Itemized Tax Deductions

Medical expenses in excess of 10% of AGI are deductible as itemized tax deductions. If you or your spouse is age 65 or older by year end, you may deduct medical expenses in excess of 7.5% of AGI. Medical expenses are tax deductible in the year paid.

Taxes. State and local income taxes as well as real estate taxes for all property owned are deductible in the year paid. Most income taxes paid to a foreign country or US possession are either deductible as an itemized tax deduction or can be taken as a credit against tax.

Mortgage interest paid is deductible, with limitations. Mortgage interest is deductible on up to two homes with a combined secured acquisition debt of $1.1 million (home equity debt is generally limited to $100,000). Points on the purchase or a refinance to make major improvements are tax deductible, but they may need to be amortized over the life of the loan.

Charitable contributions must have written substantiation. If less than $250 is given at one time, the bank draft is sufficient. If the gift is $250 or greater, a written acknowledgement of receipt from the charity is required. In most situations, the charitable tax deduction is limited to 50% of AGI. Non-cash contributions are limited to the fair market value of the items contributed, if they are used items.

Casualty and theft losses are subject to a $100 deduction and a reduction of 10% of AGI per casualty loss. A casualty is damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

Miscellaneous tax deductions are subject to a reduction of 2% of AGI. They include expenses for generating and protecting income, job-related expenses, and unreimbursed employee business expenses.

Other miscellaneous tax deductions are tax deductions that are not subject to the 2% of AGI reduction. Some examples are gambling losses up to the amount of gambling winnings, and special job-related expenses of the disabled.

Be sure to let us here at Tax Samaritan know if you feel you could be eligible for any of these tax deductions.

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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.