Common Income Tax Deductions
Common income tax deductions in the United States allow individuals to reduce their taxable income, potentially leading to larger tax refunds or reduced tax liabilities. Various expenses can be deducted, including mortgage interest, charitable contributions, medical expenses, educational costs, and state and local taxes. Homeowners can deduct mortgage interest on their primary or secondary residences, while students may deduct eligible tuition and interest from student loans, subject to income limits. Charitable donations are also deductible, provided they are made to qualified organizations and not directly to individuals. Medical and dental expenses can be deducted if they exceed a certain percentage of an individual's adjusted gross income. Taxpayers must choose between itemizing deductions or taking the standard deduction, which simplifies the filing process for those with fewer eligible deductions. Understanding eligibility and navigating the complexities of tax deductions can be challenging, so many individuals opt for professional assistance when preparing their taxes.
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Common Income Tax Deductions
When filing income taxes in the United States, an individual has the ability to make a number of deductions in order to lower his or her overall taxable income. This often has the effect of increasing one’s tax refund, as the amount of taxes paid over the course of the previous tax year may now exceed the total amount of taxes owed in that year. Individuals are frequently able to deduct a portion of expenses such as mortgage interest, charitable contributions, medical expenses, and educational expenses, including student loan interest. Although an individual may qualify for many of the most common income tax deductions, the total amount deducted may be less than the standard deduction amount set by the Internal Revenue Service (IRS). In such cases, the individual may choose to take the standard deduction rather than itemizing his or her individual deductions. Determining deduction eligibility can be difficult at times, and individuals may wish to seek professional assistance when filing to ensure that no errors are made.
Background
The federal income tax in the United States originated in 1862, when President Abraham Lincoln introduced the tax in an attempt to raise necessary funds during the Civil War. The Bureau of Internal Revenue, now the IRS, was founded at that time to manage the collection of taxes. Although the income tax was abolished, reestablished, and abolished again over the following decades, it returned for good in 1913, when the ratification of the Sixteenth Amendment rendered the federal government’s collection of taxes constitutional. Tax deductions existed from those early days, allowing taxpayers to reduce their taxable income by deducting business expenses, the cost of interest paid, and other expenses.
The standard deduction was introduced in the early 1940s as a means of simplifying tax returns for both the taxpayers themselves and the individuals responsible for processing their paperwork. The concept evolved over the following decades, becoming a set figure that lowers an individual’s taxable income for the tax year in question by a certain dollar amount. For the 2024 tax year, according to the IRS, most taxpayers under the age of sixty-five were eligible for a standard deduction of $14,600 if filing as single or married and filing separately or $29,200 if married and filing jointly. Individuals over the age of sixty-five or with serious visual impairments typically qualified for a higher standard deduction, while those who could be claimed as dependents qualified for a lower amount. Other factors, including nonresident alien status, likewise affected the standard deduction for which individuals were eligible.
While filing taxes, an individual must decide whether to itemize deductions or take the standard deduction. For taxpayers eligible for few deductions or whose deductions add up to a lower amount than the standard deduction, taking the standard deduction simplifies the filing process and allows them to decrease their taxable income more than if they itemized. However, if the total amount of a taxpayer’s itemized deductions is greater than the standard deduction, itemizing is the more prudent strategy. Deducting expenses typically has the result of increasing an individual’s tax refund or, if the individual owes federal taxes, decreasing the total amount owed.
Overview
Twenty-first-century tax code offers numerous opportunities for individuals to decrease their taxable income through deductions. An individual taxpayer could potentially be eligible for many different deductions, some far more common than others.
An individual who owns a home and pays interest on a mortgage for that property may be eligible to deduct the interest he or she paid over the course of the tax year. To be eligible for deduction, the interest must be paid as part of a mortgage on one’s first or second residence, which may be a fixed residence, such as a house, condominium, or apartment, or a mobile residence, such as a mobile home or houseboat. A homeowner may also be eligible to deduct interest paid on a home equity loan. Joint filers who took a home equity loan after December 15, 2017, may deduct interest of up to $750,000 and $375,000 for single people or those who are married and filing separately. The money from the home equity loan must have been used to buy, build, or substantially improve a primary or secondary residence.
Taxpayers may be eligible to deduct certain educational expenses paid on behalf of oneself, one’s spouse, or one’s dependent. This deduction applies to a portion of tuition and fees paid to an eligible university or other postsecondary institution. Taxpayers may likewise deduct a portion of the interest paid on qualified student loans. Income limits apply in both cases, so individuals or couples who earn above a certain amount per year are ineligible to claim those deductions. Unlike many other deductions, the educational expenses deduction and student loan interest deduction may typically be claimed even if the individual in question has chosen not to itemize deductions. As of the 2024 tax year, a student can deduct interest paid on their student loans up to $2,500.
The IRS considers certain charitable contributions to be deductible but has strict rules regarding which contributions qualify. Eligible donations must be made to qualified charitable organizations only, so contributions made directly to individuals or to organizations not considered charitable for tax purposes may not be deducted. When a donation is made in exchange for a good of some sort, such as an item offered during a nonprofit’s pledge drive or a ticket to a charity party, the taxpayer may not deduct the full amount donated; rather, he or she must subtract the value of the item received from the total amount paid. An individual may also deduct the value of noncash property that has been donated during the tax year but may be required to complete additional paperwork if the value of the contribution exceeds a specific dollar amount.
Certain medical and dental expenses may also be deductible, provided that those expenses meet certain conditions. Expenses that are typically considered eligible include payments to medical professionals such as doctors, dentists, psychiatrists, and other licensed practitioners; fees paid for inpatient care in a medical facility; payments for medical necessities such as prescription glasses, wheelchairs, and prescribed medications; and fees for transportation to medical appointments. A taxpayer under the age of sixty-five may deduct qualified medical or dental expenses if they exceed 7.5 percent of his or her adjusted gross income.
Certain state and local taxes paid during the tax year may be deducted from the federal income taxes owed. These include state and local income taxes, real estate taxes, property taxes, and sales taxes. Deductible income tax payments include those made through employer withholdings, as well as any estimated taxes paid to the local or state government. An individual may not deduct both income taxes and sales taxes and must instead choose one or the other; however, in either case, he or she may deduct real estate and property taxes as well. Eligible real estate taxes are those based on buildings or land that the taxpayer owns, while property taxes concern cars and similar items. In 2024, however, the deductions for sales taxes and property taxes combined have been limited to a maximum of $10,000, or $5,000 for individuals who are married but filing separately. Individuals may also deduct any income taxes paid to a foreign government. Income taxes paid to the US government, however, are not deductible.
If a taxpayer is an employee, he or she may be eligible to deduct certain work-related expenses, including the cost of transportation between offices, certain business entertainment expenses, and expenses related to business trips and similar instances of required travel. Some deductible expenses are subject to limitations; for example, an individual may deduct only 50 percent of the cost of unreimbursed meals purchased while on a business trip. A taxpayer who is self-employed is similarly eligible to deduct various business expenses, including travel expenses and expenses associated with the use of a home office.
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