Federal Income Tax Deduction Basics

Federal income tax deductions are a great way to lower your tax bill but you must know how to fill out the forms. If you are unsure, it is worth the money to get a qualified tax professional to do your taxes - you may even save more than you spend to hire them!

The federal income tax deduction is a statutory requirement under the American laws. It has to be paid by all American citizens who fall under the tax bracket as decided by the American government. Taxable income is calculated by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the individual’s gross income.

The following are some deductions you can take on your taxes:

1. Exemptions: Some common exclusions from gross incomes are:
i) Earnings made from life insurance contracts
ii) Earnings made from gifts and inheritances
iii) Proceeds granted for personal injuries
iv) Interest received from state and municipal bonds

It must however be noted that all of the above exemptions are subject to certain conditions, and thus a tax adviser’s help must be taken while availing these exemptions.

2. Deductions: In addition to the standard deduction, some common “above-the-line” deductions include:
i) Trade/ Business expenses
ii) Alimony
iii) IRA contributions
iv) Net capital losses
v) Expenses incurred due to property used for income generation

Income tax laws are not easy to understand. It is therefore always possible that individuals choosing the standard deduction may or may not be able to take advantage of other deductions.

3. The Standard Deduction: When individuals have minimal “below-the-line” deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows: i) Single - $4,850
ii) Head of household - $7,150
iii) Married filing a joint return - $9,700
iv) Qualifying widow(er) with dependent child - $9,500
v) Married filing a separate return - $4,850

4. Miscellaneous Itemized Deductions: These usually include:
i) Interest paid
ii) Taxes paid
iii) Losses incurred
iv) Charitable contributions
v) Medical costs borne

Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.

5. Alternative Minimum Tax: Alternative minimum tax is applicable if an individual’s taxable revenue is more than a predefined amount. In that case, the individual would otherwise pay negligible tax now has to shell out a certain amount, which lowers the advantages of certain deductions and credits.

6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:

i) State and local income and property taxes
ii) Donations made to charitable organizations
iii) Employee transference expenses
iv) Medical expenses incurred
v) Casualty losses
vi) Interest paid on mortgage

However, the individual can either avail standard deduction or itemized deduction.

  • Dont Forget About The Hybrid Car Tax Deduction
    A hybrid car can not only be good for the environment but it can be good for your taxes too! The hybrid car tax deduction enables owners of a hybrid vehicle – that is cars that have a gasoline-powered engine and an electric motor -- to claim a one-time tax relief on their federal income tax returns. This deduction, which has been provided under the Working Families Tax Relief Act of 2004, is a one-time deal. The deduction can be availed by those car owners who bought their cars in 2 ...

  • Donating Your Car For A Tax Deduction
    If you have a car to donate for a tax deduction than make sure you know the rules before you give away your vehicle. The policy regarding the car to donate for tax deduction is not as straightforward as other charitable donations. The tax relief depends on the donor's claimed value of the donation as well as on the way the charity uses the vehicle. Thus you may not know the size of your deduction when you make your donation. In addition, as from 2005, the statutes for tax deduction for cars d ...

  • Charitable Tax Deductions
    A charitable tax deduction is a great way to make your self feel good while helping others and lessening your tax burden. If you have been donating to charity you should let the tax agencies know, and avail the charitable tax deduction that becomes legitimately due to you. Your contributions to charitable organizations can add up to a sizeable deduction if you itemize them on IRS Form 1040, Schedule A. But before you make the donations you must carry out a few checks. You must remem ...