Types of Deductions for Income Tax
- Interest on your mortage payments is one of a few types of personal dedcutions.house image by hans slegers from Fotolia.com
Tax deductions are one way you can maximize your income tax return or lower you tax liability. Deductions are the amount of money you can subtract from your total gross income to determine your taxable income. Your taxable income is the amount of income you must pay taxes on. The more deductions you have, the lower you taxable income will be and the less taxes you are obligated to pay. - The first thing you will need to decide is whether you will use the standard deduction or itemize your deductions. The standard deduction is set each tax year and can change each year to account for inflation. Your standard deduction will depend on your filing status, age and blindness. Most people use the standard deduction if it is higher than their total itemized deductions. If you use the standard deduction, you may not itemize any other deduction on your tax return.
- Itemized deductions allow you to list every possible expense you incurred during the tax year that qualifies as a deduction. If you choose to itemize your deductions you will need to be able to provide documentation to prove you were entitled to each deduction. Most people use itemized deductions when their itemized deductions are higher than the standard deductions for that tax year.
- Most of your personal expenses are not deductible, and there are few exceptions. Exceptions include interest on your mortgage payments, charitable contributions, medical and dental expenses, and interest on educational loans. Investment deductions come from expenses spent on investing your money. These deductions include fees paid to money mangers or financial planners, legal fees and accounting fees. Both personal and investment deductions are held to strict limitations. Business owners need to spend money on their businesses during the year, and most business expenses are deductible in some way. These deductions include money spent on office space, supplies and equipment. For more information on what expenses are deductible, see a tax professional.
