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The IRS doesn't tax you on your total income. Instead, provided you qualify, you may make certain deductions from your taxable income, which are based on expenses that you incur during the tax year. To qualify for many of these deductions, the IRS requires that you itemize your deductions.
As of 2012, if your primary or secondary home is secured by a mortgage worth no more than $1,000,000 during the tax year, you may deduct mortgage interest that you pay each year. You may also deduct loan origination fees and mortgage insurance premiums. If you take out a construction loan to build a home, you may deduct loan interest for up to two years before you move in. Other types of expenses are deductible, such as casualty losses, theft losses and home office expenses.
You may deduct unreimbursed medical and dental expenses for yourself, your spouse and your dependents, to the extent that they exceed 7.5 percent of your adjusted gross income. This threshold increases to 10 percent starting in the 2013 tax year. Your expenses must be necessary rather than cosmetic -- you may be denied a deduction for breast augmentation surgery, for example. In some cases you are allowed to deduct premiums for long-term care insurance.
You may deduct the value of any donations to a nonprofit organization qualified under Section 501(c)(3) of the Internal Revenue Code. You deduct cash donations at face value. You deduct donations of property at either fair market value, or in accordance with special valuation rules established for certain types of property, such as automobiles. Nonprofit hospitals, schools, churches, charities and scientific research organizations typically qualify under 501(c)(3).
You may deduct real estate taxes that are based on the assessed value of your home. You may also deduct either state income tax or state sales tax, but not both. You may deduct foreign taxes -- taxes imposed on the sale of shares in a global mutual fund, for example. However, you can usually save more money by taking the foreign tax credit instead. You must have actually paid the tax during the tax year to qualify for the deduction.
You may take certain "above the line" deductions, even if you choose to take the standard deduction rather than itemizing your deductions. Also known as "adjustments," these deductions include alimony, tuition and fees paid by students, health savings account contributions, contributions to self-employed retirement plans, self-employed insurance premiums, IRA contributions, student loan interest and 50 percent of self-employment tax.
The IRS allows you to deduct many more expenses from your taxable income, some of which don't apply to most taxpayers. You may, for example, deduct unreimbursed business expenses regardless of whether you are an employee or are self-employed. You may also deduct union dues, expenses related to adopting a child and even stockbroker's fees.
- James Maertin, C.P.A.: Deductions
- EFile.com: Federal Tax Credits for Family, Children, Home, Work, and School Read more at: http://www.efile.com/tax-credit/federal-tax-credits/
- Internal Revenue Service: Itemized Deductions
- Internal Revenue Service: Tax Credits
- Bankrate.com: No Need to Itemize Above-the-Line Deductions
- USTaxCenter: Dependents
- family image by Mat Hayward from Fotolia.com