Tax deductions are reductions in income that the government can tax. The purpose of tax deductions is to decrease one’s taxable income, thus decreasing the amount of income tax that a taxpayer owes to the federal government.
Hundreds of deductions can reduce your taxable income, but many people do not know about or know how to use them.
Standard deductions and itemized deductions are the two main types of tax deductions. There is nothing special about the standard deduction – it is just a dollar amount that is set by the IRS each year. The amount of itemized deductions depends on what is declared in each category.
Deductions include:
A casualty or theft loss occurs when you lose personal or business property due to a casualty, such as a fire, flood, tornado, or theft. If you have insurance for your damaged property, a deduction cannot be taken on your tax return unless you file an appropriate insurance claim for compensation.
If you have insurance, you must file a claim, even if you don’t expect compensation. Tax deductions are not available for all casualty and theft losses.
If you itemize your tax deductions on your tax return, you can claim a tax deduction for charitable contributions made to qualified organizations. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations may apply.
Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are capped at 30 percent of adjusted gross income. Tax deductions cannot exceed half of your adjusted gross income on your tax return. There is a five-year carryover period for excess charitable contributions.
To deduct interest on your tax return and thereby increase your potential tax refund, you must have paid off a debt and have been legally liable for the debt. You must also itemize your tax deductions.
There are six categories of qualified interest tax deductions:
Deductible medical and dental expenses include those paid for diagnosing, curing, relieving, treating, or preventing disease and for treatments affecting any part or function of the body. The expenses can be justified in some cases by alleviating or preventing a physical or mental defect.
In addition to birth control pills, hospital service fees and medical service fees are deductible expenses. Cosmetic surgery, health club dues, and diaper services are not deductible.
Miscellaneous itemized tax deductions include employee expenses, income production expenses, and other expenses. There is usually a 2% limit on the deductions. After subtracting 2% of your adjusted gross income, you can deduct the remaining amount. A few examples are union dues, employee home office expenses, and uniforms and work clothes.
Some non-business-type taxes are deductible. These fall into three distinct categories:
The tax must be charged to you and paid during the taxable year in order to qualify as a tax deduction.
You can only deduct those expenses exceeding 2% of your Adjusted Gross Income.
Miscellaneous deductions subject to the 2% limit fall into these categories:
Unreimbursed Employee Expenses:
Other miscellaneous deductions include:
Miscellaneous tax deductions that aren’t subject to the 2% limit include:
For more info on miscellaneous and other tax deductions, see IRS Publication 529 – Miscellaneous Deductions.
To be specific, the TCJA suspended for 2018 through 2025 a large group of deductions called “miscellaneous itemized deductions,” which were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income.
The following deductions are included:
No unreimbursed job expenses are deductible from 2018 through 2025. Your employer should reimburse you for them. The reimbursement is tax-free if you properly document your expenses. Alternatively, you can ask for a raise to help pay for these expenses, but such a raise would be taxable.
Investment interest is the interest you pay on a loan to purchase an investment. Taxpayers who itemize can deduct investment interest. This deduction, however, is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried forward for future deductions. Generally, investment income does not include capital gains or dividends that qualify for favorable tax treatment.
However, you can elect to include long-term capital gains and qualifying dividends in your investment income. By doing so, you can deduct a greater amount of investment interest.
If you do this, however, your long-term capital gain and qualifying dividends will be taxed at your ordinary income tax rates, not the lower capital gains rates.
You can claim a portion of your total job expenses and some miscellaneous expenses. Your expenses must exceed 2% of your adjusted gross income (AGI). Deduct these expenses from your taxable income on Schedule A.
Typically, these three categories fall under the 2% rule:
The subject of tax law can be very confusing and frustrating. The tax law changes every year, making matters worse. A tax attorney can help you understand current tax law and how it affects your income tax problem. Whether you need to go to tax court or have questions about the deductibility of your expenses, a lawyer can assist you.
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