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Income tax deductions are tax breaks you receive because you spent money on certain things during the tax year. Some deductions are large and some are limited. A variety of factors influence whether you can take a deduction and, if you can, how much of a deduction you can take. If you are unsure, you should always speak to a tax professional. Some general rules apply to everyone.
Deductions Reduce Your Income
Tax deductions come off your income. If you earned $40,000 during the tax year, and if you qualify for a $3,800 deduction, you only have to pay taxes on $36,200. The impact of this on your tax bill depends on your tax bracket. Your tax bracket is the percentage of your income that you must pay in taxes. The more you earn, the higher your tax bracket is. If you pay 25 percent of your income in taxes, you’ll save $950, or 25 percent of $3,800. If you’re in a 15 percent tax bracket, you’ll save only $570, or 15 percent of $3,800.
You Can Deduct for Your Exemptions
The most common income tax deductions are the exemptions you take for yourself, your dependents, and (in some cases) your spouse. These deductions are $3,800 for each, as of 2012. If you support two children and if they qualify as your dependents, you can deduct $11,400 in exemptions from your income. You can claim your children if they’re younger than 19, or if they’re full-time college students under the age of 24. Internal Revenue Service rules for dependents are complicated, and some other qualifications apply as well. You can sometimes claim other adults. You can sometimes claim children who are not biologically related to you.
You Can Take the Standard Deduction
In addition to the exemptions, taxpayers who do not itemize their expenses during the tax year can take the ‘standard deduction.” The amount you can deduct depends on your tax status. As of the 2012 tax year, if you’re single and have no children, you can deduct $5,950. If you support dependents, you’ll usually qualify for head-of-household status, for which you can deduct $8,700. Married couples filing jointly can deduct $11,900. Standard deductions typically increase each year in an attempt to keep pace with inflations.
You Have Other Options
You can choose to itemize deductions, rather than take the standard deduction, but there are some limitations. For example, you can deduct uninsured medical expenses for yourself or your dependents, but only the amount that exceeds a certain percentage of your income. You can also deduct property taxes, state and local taxes, charitable contributions, and mortgage interest. You will save money by itemizing only if your itemized deductions add up to more than your standard deduction.
A Tax Lawyer Can Help
The law surrounding the best use of income tax deductions is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.