There are many Tax deductions available to individuals and business to reduce their tax liability. Tax deductions reduced the tax payable by lowering taxable income. They works different from tax credit which reduce the tax amount dollar by dollar.
There are several levels of tax deductions for individuals:
- Above the line
- Itemized deductions
- 2% of income
- 7.5% deductions
- Diminished deductions
Above the Line Deductions
These particular deductions have value because they reduce the amount of reportable income subject to taxation. An above the line deduction could lower your income at least one tax bracket and possibly more. “The line” is located on the front page of your tax return just below the box containing your adjusted gross income (AGI).
The deductions that are above the line include traditional IRA contributions, student loan interest, HSA contributions, moving expenses and half of the self-employment tax. Some people will have none of the items on this list. Others may get lucky and be able to take all of them.
If entries on Schedule A will total more than the standard deduction for your filing status, then it is prudent to fill out this form completely. Some of the items that you can list on this schedule include:
- Medical, Dental, Therapeutic expenses
- Taxes paid to state and local entities
- Mortgage interest
- Real estate taxes
- Personal property taxes
- Contributions to approved recipients
- Miscellaneous 2% threshold items
Need to Know
In order to understand if a deduction will be a benefit or a liability, you need to know if it is an itemized deduction or an above the line deduction. If it is an itemized deduction, will the total of all itemized deductions be significantly larger than the standard deduction.
You also need to know if the deduction you are about to take has a restriction or percentage of income that it must exceed before you can take the deduction. As an example, the deduction for medical expenses is only that part of the total that is more than 7.5% of income. Only the miscellaneous expenses that exceed 2% of income are deductible.