Can I deduct that? With tax season here, chances are you’ve heard those words or you have asked that question yourself.
What is a tax deduction? A tax deduction, or tax write-off, is used to decrease taxable income, thereby decreasing the amount of tax owed. There are different types of tax deductions available. In addition to tax deductions there are tax credits. Tax credits are subtracted not from taxable income but directly from a person’s tax liability; thus they reduce taxes dollar for dollar. They could be refundable or non-refundable.
Types of Tax Deductions: Above-the-Line Deductions, Standard Deductions, and Itemized Deductions
Above-the-Line Deductions: are Adjustments to gross income, or deductions found above-the-line adjusted gross income line on page 1 of the Form 1040. They are generally more advantageous to the taxpayer as they are directly affecting taxable income. Examples of above-the-line deductions include contributions to a traditional IRA, alimony payments, interest on student loans, and self-employed health insurance deduction.
Standard Deduction: is a set amount that ensures all taxpayers have at least some income that is not subject to federal tax (i.e., tax-free). In general, the standard deduction is adjusted each year for inflation and varies according to your filing status. You can only take the standard deduction if you do not itemize deductions. For 2016 tax returns the standard reductions are: $6,300 for single taxpayers or married filing separate; $12,600 for married couples filing jointly or qualifying widow(er); $9,300 for heads of household. There is an additional standard deduction for elderly or blind taxpayers, which is $1,250 for tax year 2016. The additional standard deduction amount increases to $1,550 if the individual is also unmarried and not a qualifying widow(er).
Itemized Deductions: are items deemed by Congress that help reduce your income, but are subject to limitations. These are claimed on Schedule A and include items such as medical expenses, state, local and property taxes, home mortgage interest, gifts made to charity and certain other expenses. If all these items add up, after limitations, to an amount greater than your standard deduction, you will report your itemized deductions.
Some items that taxpayers may think are tax deductible that are not, include: political donations; volunteer time; donations to charities that don’t qualify; pledges – the IRS allows deductions for money you actually gave not money that you promised to give; undocumented cash donations; business related travel – distinguish between business and pleasure while traveling; business related entertainment – only 50% of the cost is deductible; and commuting costs. Consult your Tax Advisor to make sure you are taking advantage of all the tax deductions that are available to you.