By: Adam Lucas, Credo Financial Services
Deductions are expenses that the government has decided you shouldn’t be taxed on. A good example of a deductible expense is the money that comes out of your paycheck to pay your state government’s income taxes – you didn’t actually ever see that money, so why should you have to pay Federal income tax on it? In other words, deductions are tax breaks.
The standard deduction is great! Even if you don’t have a collection of things to itemize, you can still get a large chunk subtracted from your Adjusted Gross Income (AGI) to reduce your taxable income; this is a deduction ba$ed on your filing status (Single, Married Filing Joint, etc.). However, if you project to have enough itemized deductions that add up to more than the standard deduction, you will probably want to take a shot at unlocking some savings on your taxes.
In order to qualify for these tax savings, you need to keep track of them, and include a list of all of the tax deductions for your preparer that you should get on your tax return. This is a good practice if you can see that you have a good chance each year to exceed what is already offered as the standard (deduction) to reduce taxable income.
Here is a list of some common (itemized) deductions:
- State and Local Income Taxes
- Mortgage Interest
- Property Taxes
- Medical and Dental Expenses
- Unreimbursed Business Expenses
- Charitable Contributions
- Theft or Disaster Damages
Some of these, like medical and unreimbursed business expenses, are only deductible above a certain threshold – only if you have an unusually large amount. For example, starting in 2013, the threshold for medical expenses is 10% of AGI, meaning that a couple earning $100,000 who has $8,000 in medical expenses cannot deduct them, or that if they had $11,000 of expenses, only $1,000 would be deductible.
There are a few other deductible expenses that are less common too. IRS.gov has the full list of itemized deductions.
Note: Typically mortgage interest is, by far, the biggest deduction that people have. People who don’t have a mortgage might not get a chance to exceed standard deduction, but this isn’t true in all cases.
So, which one did you get?
I will take the Standard Deduction
If you have found out that you will take the standard deduction –
Congratulations! – your life is a little simpler.
I will Itemize my deductions
Bravo! There are some tax-saving opportunities available for you to unlock.
Adam Lucas, RTRP
Manager, Tax Services
Credo Financial Services, LLC