Tax deductions allow you to reduce your taxable income and also your tax bill. A tax deduction differs from a tax credit, which is applied directly to your tax bill, reducing it dollar for dollar. There are 4 major categories of tax deductions.
The Standard Tax Deduction
Most taxpayers claim the standard deduction — a fixed amount that reduces the income on which you are taxed. Here are the standard deduction amounts according to filing status.
- Single or Married Filing Separately — $5,700
- Married Filing Jointly or Qualifying Widow(er) — $11,400
- Head of Household — $8,350
Add to these figures $1,100 ($1,400 if you are Single or Head of Household) if you are 65 or older. Add another $1,100 or $1,400 if you are blind. You can also increase the standard deduction by up to $500 ($1,000 if Married Filing Jointly) of U.S. real estate tax that you pay, by a net disaster loss and by sales or excise tax you pay on a new car purchased after Feb. 16, 2009 (limits apply to the sales or excise tax deduction).
Itemized Tax Deductions
If total itemized tax deductions are more than the standard deduction, it's usually a good idea to itemize. For most taxpayers, purchasing a home makes it worthwhile to itemize deductions because they can deduct interest, real estate tax, and, for loans taken out after 2006, certain mortgage insurance premiums. Here are some popular (and commonly overlooked) itemized deductions not related to home ownership:
Above-the-line Tax Deductions
- Medical expenses — In addition to what you've spent on doctors, hospitals and medicine, other tax deductible items include health insurance premiums, prescription eyeglasses and contact lenses, hearing aids, medical transportation, equipment for disabled people, and nursing home expenses.
- State and local income taxes — This category includes income tax or sales tax and personal property tax. For 2009, you can also deduct sales or excise tax paid for a new vehicle purchased after Feb. 16, 2009. Some limitations apply.
- Charitable contributions — These include cash and property such as new and used household goods and items, securities, and vehicles donated to qualified charitable organizations. Volunteer expenses also can be deducted.
- Casualty losses — If you suffered a loss because of theft, fire, storm damage or other casualty, you can deduct an unreimbursed loss if it is more than the sum of $500 and 10% of your adjusted gross income.
- Unreimbursed out-of-pocket job expenses — Tax-deductible expenses include vehicle expenses (other than commuting), travel expenses, uniforms, union dues and continuing education expenses.
- Miscellaneous expenses — Safe-deposit box fees, investment expenses, tax preparation fees and certain legal fees are examples of miscellaneous tax deductions. The tax deduction for this category of expenses is allowed only for the total of these expenses and unreimbursed job expenses that is more than 2% of your adjusted gross income. Note: There are a few miscellaneous tax deductions that are not subject to the 2% floor. These include repayments of amounts exceeding $3,000 that you previously included in your income, gambling losses, estate tax on income in respect of a decedent, and a decedent's investment in a pension.
If you qualify, you can claim these tax deductions even if you don't itemize. There are also above-the-line tax deductions for self-employed individuals.
- Student Loan Interest Deduction — up to $2,500
- Tuition and Fees Deduction — up to $4,000 of qualified higher education expenses
- Moving expenses — the cost of moving your family and belongings to a new job location
- Alimony paid
- Military reservists deduction — a tax deduction for unreimbursed travel expenses for reservists who travel more than 100 miles from home and stay overnight
- Traditional IRA contributions — up to $5,000 ($6,000 if 50 or older)
- Contributions to HSAs (health savings accounts)
Above-the-line tax deductions for self-employed individuals:
- Half of your self-employment (Social Security and Medicare) tax
- 100% of self-employed health insurance premiums for yourself and family
- Contributions to self-employed retirement plans, such as SEPs and SIMPLE plans
See how much self-employment tax you'll owe this year with our Self-employment Tax Estimator.
Schedule C Tax Deductions
If you own your own business, some additional tax deductions apply to you. These are claimed directly on your business schedule, called a Schedule C. (Note: Farmers use Schedule F and owners of rental property use Schedule E.)
- advertising and promotional costs
- business liability insurance
- legal and professional services
- car and truck expenses
- wages, employment taxes, employee benefit plans and contributions to employee retirement plans
- home office expenses
For other tax deductible items, see the schedules. There are many rules and limitations pertaining to some of these tax deductions. Be sure to discuss them with your tax professional.