Personal Income Tax Deductions

V. Tax Deductions

The Standard Deduction
Itemized Deductions
Tax Deductions vs. Tax Credits
Popular Itemized Deductions
Tax Deductions for Individuals

1. The Standard Deduction

Tax deductions lower your taxable income and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).

There are two main types of tax deductions: the standard deduction and itemized deductions. A taxpayer must use one or the other, but not both. It is generally recommended that you itemize deductions if their total is greater than the standard deduction.

Understanding the Standard Deduction

The standard deduction is a dollar amount that reduces your taxable income. It is usually adjusted for inflation every year. Your standard deduction amount is based on your filing status, and it is subtracted from your AGI (adjusted gross income).

The standard deduction for tax year 2010 is as follows (based on your filing status):
• Single: $5,700
• Head of Household: $8,400
• Married Filing Joint: $11,400
• Married Filing Separately: $5,700
• Qualifying Widow/Widower: $11,400
• Dependent: $950-$5,700

The standard deduction for tax year 2011 is as follows (based on your filing status):
• Single: $5,800
• Head of Household: $8,500
• Married Filing Joint: $11,600
• Married Filing Separately: $5,800
• Qualifying Widow/Widower: $11,600
• Dependent: $950-$5,800

The standard deduction for tax year 2012 is as follows (based on your filing status):
• Single: $5,950
• Head of Household: $8,700
• Married Filing Joint: $11,900
• Married Filing Separately: $5,950
• Qualifying Widow/Widower: $11,900
• Dependent: $950-$5,950

The standard deduction can be claimed on IRS Tax Form 1040, IRS Tax Form 1040A, or IRS Tax Form 1040EZ.

The standard deduction amount can change from year to year, and is based mainly on inflation.

Note that there is an additional standard tax deduction for people over the age of 65 and/or those who are blind? The deduction for the blind is allowed if you or your spouse is medically claimed to be totally or partially blind on the last day of the year.

An additional standard deduction for the elderly or visually impaired is as follows (for tax year 2010):
• $1,400 for single or head of household
• $1,100 for married filing jointly, married filing separately, or qualifying widow.

The additional amounts for 2011 are:
• $1,450 for single or head of household
• $1,150 for married filing jointly, married filing separately, or qualifying widow.

The additional amounts for 2012 are:
• $1,450 for single or head of household
• $1,150 for married filing jointly, married filing separately, or qualifying widow.

Other additions to the standard tax deductions are for: loss from a federally declared disaster, and local and state real estate taxes (up to $1,000 for joint filers), among others.

The amount of your standard deduction can be reduced if you are claimed as a dependant on another person’s return. In most cases, the amount of the deduction is the greater of your earned income for the year plus $300 or $950.

There are several groups of people who do not qualify for the standard deduction. They include: a married individual with “married filing separately” status and a spouse who is itemizing deductions, a person who is classified as a “nonresident alien,” and a person who has changed his accounting cycle and is not filing for a full 12-month period.

Understanding the standard tax deduction is very important. This makes it easier for you to decide whether taking the standard deduction or itemizing your deductions is the best route for you.

2. Itemized Deductions

Understanding Itemized Deductions

There are certain expenses that qualify for a deduction on your income tax return. These are often times referred to as itemized deductions. If you do not qualify for the standard deduction, you may choose to itemize your tax deductions. In fact, many people never take the time to learn about itemized tax deductions because they rely on the standard deduction every year. While there is nothing wrong with this, you may be able to save even more money by itemizing.

While you may be interested in the standard tax deduction, you should note that there are several groups of taxpayers who are required to itemize. They include: a married person filing separately with a spouse who is itemizing, a person who is classified as a nonresident alien, and a person who has changed his accounting cycle and is not filing for a full 12-month period.

A taxpayer will also typically itemize deductions if it offers them more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction). As a general rule of thumb, if your itemized deductions are greater than the standard deduction, you should definitely itemize. Along with this, you may also want to employ itemized deductions if you find yourself in one of the following situations: you have substantial medical expenses, you pay taxes and interest on property, you have a lot of business expenses, or you have made big charitable contributions during the past tax year.

Some of the expenses that you may be able to include when itemizing your deductions are as follows: real estate taxes, personal property taxes, medical expenses, dental expenses, local and state income tax, home mortgage points, theft losses, charitable contributions, and job expenses. Of course, these are just a few of the more common itemized tax deductions. There are many others that you may be able to include, which will reduce your total amount of taxable income.

Certain itemized deductions are based on a minimum (or “floor”) amount. This means that you can only deduct amounts that exceed the specified “floor.” Miscellaneous itemized deductions, for example, are subject to a 2% floor. Simply put, this means your expenses are generally deductible to the extent that they exceed 2% of your AGI. Therefore, a taxpayer who with an AGI of $50,000 could claim itemized deductions for expenses/amounts over $1,000 (because 2% of $50,000 is $1,000). For medical expenses, however, you can only deduct amounts that exceed 7.5% of your AGI.

There is also an income limit for taxpayers who itemize. If your AGI exceeds $83,400 (for single and married filing separately) or $166,800 (for married filing jointly) then a portion of itemized deductions is not permitted.

If you decide to itemize your tax deductions, it is important to keep detailed records of those tax deductions ― including documentation for medical expenses, property taxes, charitable donations, interest expenses, and nonbusiness state income taxes.

You may use IRS Tax Form 1040 Schedule A to figure your itemized deductions, and attach it to your IRS Tax Form 1040 (but not Form 1040A or Form 1040EZ).

3. Tax Deductions vs. Tax Credits

As you know, tax credits and tax deductions can help reduce your overall income tax liability. Every year, millions of taxpayers search for credits and deductions that can help them save money. However, many people are under the impression that tax credits and tax deductions are the same thing. While they are similar in many ways, there are several key differences that you need to be aware of.

Most importantly, a tax deduction helps to reduce the amount of your taxable income (i.e. the amount of your income that is subject to tax). On the other hand, a tax credit helps reduce the actual amount of tax that you owe.

Tax Deductions

The standard deduction is a dollar amount that reduces your taxable income. It is usually adjusted for inflation every year. Your standard tax deduction amount is based on your filing status, and it is subtracted from your AGI (adjusted gross income).
If you do not qualify for the standard tax deduction, you may choose to itemize your deductions. A taxpayer will also typically itemize tax deductions if it offers them more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction). Certain itemized deductions are based on a minimum (or “floor) amount. This means that you can only deduct amounts that exceed the specified “floor.” There is also an income limit for taxpayers who itemize.

Alternatively, above-the-line deductions are taken before your AGI is calculated (instead of after, like the other tax deductions). Above-the-line deductions are subtracted from your gross income, and the resulting number is your AGI. Above-the-line tax deductions apply whether you itemize or not.

The sum of your tax deductions, if itemized, is subtracted from your gross income. The number that is left is known as your adjusted gross income (AGI). Common tax deductions include: student loan interest, mortgage interest, traditional IRA contributions, tuition payments, and alimony payments. Of course, this is just a small sampling of the many deductions that may be available to you.

Tax Credits

Tax credits provide a dollar-for dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers $750 more in savings than a $1,000 deduction.

Tax credits essentially reduce your liability dollar-for-dollar. That being said, they cannot reduce your income tax liability to less than zero. Simply put, your gross tax liability is the amount you are responsible for paying before any credits are applied.

The majority of tax credits are non-refundable. This means that any excess amount expires the year in which it is used, and is not refunded to you. There are some refundable tax credits, though. With these, your refund can grow.

To get a better idea of how tax credits work and whether or not you qualify, you need to know what is available to taxpayers in your situation. Some of the most common tax credits include: a credit for child and dependent care expenses, education tax credits, the earned income tax credit, adoption tax credit, and the foreign tax credit. Just because you qualify for one tax credit does not mean that you qualify for the rest. For example, the foreign tax credit is only available to those who pay taxes in a foreign country. Most Americans do not fit into this group, but may qualify for other credits.

How much are tax credits worth? Again, this depends on the particular credit you’re talking about. The Child Tax Credit, which is one of the most popular, can be worth up to $1,000.00 depending on your situation.

Just as the amount of each tax credit is different, so are the qualification guidelines. Since a tax credit is so helpful to the overall amount of money that you pay, it is essential that you are 100% accurate with the information you provide. If you are unsure of whether or not you’re eligible, it is better to check with a tax professional before including the tax credit on your return.

While tax credits are less common than tax deductions, they are available for things such as adopting a child, buying a first home, child care expenses, and caring for an elderly parent. Additionally, there are many business tax credits that you should also consider.

Conclusion

Both tax credits and tax deductions offer benefits. They are two different ways to reduce the amount of tax owed. Some people qualify for many tax credits and deductions, whereas others are not able to take advantage of nearly as much. As long as you are staying within the tax code of the IRS and you’re honest about your qualifications, you have nothing to worry about.

The main difference is that tax deductions are subtracted from your gross income, while tax credits are subtracted directly from the amount you owe. In short, this means that be able to claim a tax credit is usually better than a tax deduction.

All in all, both tax credits and deductions can help you pay less income tax. Your goal as a taxpayer should be to take full advantage of every tax credit and deduction that you qualify for. If you are unaware of which tax credits and deductions are available, hire a tax professional to show you the ropes.

4. Popular Itemized Deductions

There are two main types of tax deductions: the standard deduction and itemized deductions. A taxpayer must use one or the other, but not both. It’s generally recommended that you itemize deductions if it offers you more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction).

You may use IRS Tax Form 1040 Schedule A to figure your itemized deductions, and attach it to your IRS Tax Form 1040 (but not Form 1040A or Form 1040EZ).

Tax Deductions for Medical Expenses

The IRS allows medical tax deductions for “the prevention or alleviation of a physical or mental defect or illness,” a relatively broad category. Common types of medical expenses that may be deducted include the following:

Fees paid directly to doctors, dentists, chiropractors, psychologists and practitioners of Christian Science
Hospital and nursing services
False teeth, wheelchairs, guide dogs, and laser eye surgery
Any prescription drugs, including those for nicotine withdrawal
Fare for an ambulance, taxi, bus, or train used for transportation to medical care, or mileage from your car at a standard mileage rate
The cost of participating in a weight loss program for obesity

Tax deductions are not allowed for most cosmetic surgery, funeral or burial expenses, toothpaste, or toiletries. Additionally, you may not deduct expenses that you received reimbursement on during the year.

To claim medical expenses, you must itemize your tax deductions using IRS Tax Form 1040, Schedule A. Keep in mind that you may only deduct the medical expenses that exceed 7.5% of your adjusted gross income (AGI).

You may be able to combine your discretionary medical expenses into a single year in order to surpass the 7.5% tax deduction limitation. You can also add in expenses paid on behalf of a spouse, a dependent, or (in some cases) parents. Additionally, if you are able to include insurance premiums paid by an employer-sponsored health insurance plan, cafeteria plan, or HRA (Health Reimbursement Arrangement) in Box 1 of your W-2 Form, you may deduct those as well.

Tax Deductions for Health Insurance

To offset the high cost of health insurance, there are some federal tax deductions that may benefit you. If your employer provides group health care coverage, you are not required to pay taxes on the contributions to your health insurance premiums. If your employer does not provide medical coverage, a Health Savings Account (HSA) may be able to help you.

An HSA is an above-the-line tax deduction that can reduce your federal income tax liability. The major benefit of HSAs is that they are owned and managed by individuals ― so account holders can keep the funds even if they change jobs. With an HSA, your employer can make tax-free contributions to your account and you can save money tax-free. The funds deposited into an HSA are exempt from federal income tax, as long as the money is used to pay for out-of-pocket health care expenses.

Similar to retirement accounts, the investment earnings and interest from your HSA contributions will accumulate tax-free. Funds can be carried over from year to year, and money can be withdrawn in retirement (for non-qualified expenses) with no penalties ― features that attract many higher-income individuals.

Additionally, HSA account holders who are aged 55 and older may make $1,000 annual catch-up contributions. Statutory contribution limits are decided by the IRS every year, and the limits are enforced for deposits made by the account holder and his/her employer.

HSA funds can be used to pay for a variety of health care expenses ― including prescriptions, doctor’s visits, hospital stays, medical tests, dental care, medical equipment, over-the-counter drugs, and long-term care insurance premiums. Funds are typically accessed with a debit card or checks (supplied by the health insurance provider).

If the account holder dies, any funds left in an HSA can be transferred tax-free to a spouse or other beneficiary, who will have to pay taxes on distributions. Also keep in mind that funds withdrawn for nonqualified medical expenses are subject to a 10% penalty (for those younger than 65) and income taxes.

Tax Deductions for Work-Related Educational Expenses

It is well-known that education costs money and tuition is expensive. These days, more and more people are going back to school to improve their technical or professional skills, qualify for promotion or advancement, earn higher paychecks, or purely to enhance their quality of life. Claiming a deduction on your tax return for your work-related educational expenses may help offset the high cost of education.

There are a few rules regarding the tax deduction of work-related educational expenses. They are as follows:

You must itemize deductions on your tax return (Form 1040, Schedule A) ― you cannot take the standard deduction. Taxpayers generally itemize deductions when they do not qualify for the standard deduction, or when their total number of qualified deductible expenses is more than the standard deduction. (The standard deduction is $5,700 for single filers and $11,400 for joint filers, for the year 2009.)
When work-related educational costs are itemized, they are considered “miscellaneous” expenses and are subject to a 2% minimum ― only the amount of miscellaneous expenses that exceed 2% of your gross income can be deducted.

For expenses to be tax deductible, they must meet all of the following conditions (as stated by the IRS):

1. Your expenses must be for education that maintains or improves your job performance.

2. Your expenses must serve the purpose of your employer, and must be required by your employer (or by law) in order to keep your status, salary, or job.

3. Your expenses must be for education that is closely related to your current job skills. They cannot be used for an education program that will qualify you for a new trade or business.

Expenses that do qualify for a tax deduction include the following:

Tuition, supplies, books, lab fees, and other similar items
Certain travel and transportation
The cost of research and typing (when part of an educational program)

Employees are generally required to complete Tax Form 2106 (Employee Business Expenses) or Tax Form 2106-EZ (Unreimbursed Employee Business Expenses) to claim this tax deduction, and attach it to their 1040 Form. Those who are self-employed can report their educational expenses on Form 1040 Schedule C (Profit or Loss From Business), Form 1040 Schedule C-EZ (Net Profit From Business), or Form 1040 Schedule F (Profit or Loss From Farming).

Tax Deductions for Charitable Contributions

In general, cash and property donations to qualified charitable organizations are deductible on your individual income tax return. You may also carry forward excess tax deductions for 5 years. However, if you receive something back in exchange for your donation (such as an item or service), you must reduce your tax deduction by the value of that item/service. For instance, say you donate $150 to a qualified charity and you receive a “gift” book that is worth $30 ― the amount of your total charitable tax deduction would be $120.

The Pension Protection Act of 2006 changed some rules for charitable tax deductions:

Cash Contributions: To validate donations of cash/money, taxpayers must provide bank records or written acknowledgement from the charity, specifying the date of the donation, the amount of the donation, and the name of the charity.
Noncash Contributions (clothing and household items): Noncash donations need to be in “good” condition. For donations over $500, additional information must be provided on the individual’s federal tax return. For noncash donations over $5,000 (not including publicly traded securities) and nonpublic stock worth over $10,000, certified appraisals are required.

The value of your time and/or services cannot be claimed as a charitable deduction. However, there are certain “out-of-pocket” expenses that may be tax deductible ― such as $0.14 per mile for charitable travel. Additionally, the total charitable deduction on your tax return cannot be more than 50% of your AGI (adjusted gross income). Charitable contributions may be claimed on Lines 16-19 of IRS Tax Form 1040 Schedule A.

Tax Deductions for Charitable Donations of Property

Donating appreciated property to charity is an often overlooked tax strategy. It allows taxpayers to deduct donated property that would otherwise be subject to capital gains tax. Note that your property is appraised for a tax deduction at its current market value, not what you originally paid for it. If a wise investment of yours has appreciated in value, and you are willing to part with it for a worthy cause, this is a good option.

If the value of your donated property has depreciated, consider selling it and giving the proceeds to a charitable organization rather than donating the property directly. That way, you can deduct your initial capital loss and deduct the property a second time as a charitable contribution. (Otherwise you can only deduct this property once ― at its fair market value, when you donate it ― and you will not be able to deduct the difference between its current, lowered value and what you originally paid for it.)

In general, you cannot deduct more than 50% of your MAGI (modified adjusted gross income) in tax donations. When it comes to donating appreciated assets, this percentage drops to 30%. There are exceptions, such as a charity auction, where you can donate land or other appreciated property (such as stocks or bonds) and deduct these contributions at full fair market value ― even if they exceed 50% of your gross income that year. You may also deduct appraisal fees to find out the value of your charitable contribution.

Tax Deductions for Vehicle Donations to Charity

Got a clunker taking up space in your garage? Donating it to charity may or may not be a smart tax move, depending on the value of the car and what the charity does with it.

Before 2004, charitable drivers could look at a reliable source, such as the Kelley Blue Book, to find a car’s estimated value and deduct that amount on their tax return. But after a Treasury report found that many taxpayers were overvaluing their old cars, a $500 limit was placed on tax deductions for most donated vehicles.

A car can, however, be deducted for what the charity sells it for, which may be more than $500. But keep in mind that the price a not-for-profit charity is able to net for your car will likely be well below what the Blue Book says it’s worth. Don’t forget to ask for receipts. You will be required to provide proof of the sale within 30 days of when it takes place, and proof of your contribution within 30 days of when you donate the car.

If a charity uses your vehicle for their own purposes (such as a local Goodwill using your van to pick up donations) and eventually sells it, and is able to provide proof of its use in the meantime, you may be able to deduct the vehicle’s original value rather than its lower sale price. Make sure that any charities you donate to for tax purposes have 501(c)(3) tax status with the IRS, and keep in mind that you must file an itemized deduction (using Tax Form 1040, Schedule A) rather than a standard deduction.

5. Tax Deductions for Individuals

The Standard Deduction vs. Itemized Deductions

The standard deduction is a dollar amount that reduces your taxable income. It is usually adjusted for inflation every year. Your standard tax deduction amount is based on your filing status, and it is subtracted from your AGI (adjusted gross income).
If you do not qualify for the standard tax deduction, you may choose to itemize your deductions. A taxpayer will also typically itemize tax deductions if it offers them more benefits than the standard deduction (i.e., when the total amount of qualified deductible expenses is greater than the standard deduction). Certain itemized deductions are based on a minimum (or “floor) amount. This means that you can only deduct amounts that exceed the specified “floor.” There is also an income limit for taxpayers who itemize.

Above-the-Line Deductions

Above-the-line tax deductions are taken before your AGI is calculated (instead of after, like the other deductions). Because of this, many believe this type of tax deduction to be more advantageous to taxpayers. Above-the-line deductions are subtracted from your gross income, and the resulting number is your AGI. These tax deductions apply whether you itemize or not. They are designed to help protect your personal exemptions and itemized deductions from phaseouts.

Some above-the-line deductions include the following:

Student loan interest
Business mileage
Moving expenses
Alimony
Contributions to qualified retirement accounts
Early withdrawal penalties

Tax Deductions for Homeowners

If you own a home there are many income tax deductions that you can take advantage of. There is no denying that you spend a lot of money, month in and month out, to maintain your home. The least you can do for yourself is take advantage of the tax deductions that the IRS makes available to people in your situation.

Of course, you cannot get started until you know which tax deductions are available and whether or not you are eligible. There are sure to be some deductions that are perfect for you, but others that you are going to have to pass on for the time being. The more you learn about the many tax deductions for homeowners the better off you are going to be when tax time rolls around.

Do you pay interest on your mortgage? Your answer is most definitely, yes. In most cases, mortgage interest is fully tax-deductible. Even though it can be a pain in the neck to pay interest every month on a mortgage, at least you get to deduct this amount when tax season rolls around.

Real estate and property taxes also qualify as a tax deduction. These can be deducted as an expense against your income. Just like mortgage insurance, you are going to be required by your local area to pay real estate and property taxes. Make sure you take advantage of this tax deduction, as it can be a big one.

Do you work from home? If so, you should know that this can often times lead to a sizeable tax deduction. All expenses related to your home office, including basic upkeep, may be 100 percent tax-deductible. Along with this, a portion of the cost of your utilities may also qualify. Of course, you need to be very careful with this tax deduction. If you do not have a dedicated office space, you are not going to qualify.

Many people pay private mortgage insurance (PMI) because they did not have a down payment of at least 20 percent. This can lead to a great tax deduction, if you qualify. To be eligible, your adjusted gross income (AGI) must be less than $110,000 and your home purchased or refinanced after January 1, 2007.

This is just a small sampling of the many tax deductions available to homeowners. If you own your home you might as well take full advantage of these tax deductions, as well as any others that you are eligible for.

Mortgage Points Tax Deduction

Many homebuyers and homeowners take advantage of the federal tax deduction for mortgage points. Mortgage points refer to certain charges that are paid to attain a home mortgage. Sometimes called “discount points”, they are a form of prepaid interest that must be deducted over the term of a mortgage. Typically, each point is equal to 1% of the amount of the loan (in some cases a point is equal to 2% or 3% of the loan amount).

The IRS allows mortgage points to be deducted as home mortgage interest on Line 10 of Tax Form 1040 (Schedule A) in the year of actual payment.

In order to get a tax deduction for your mortgage points, all of the following nine conditions must be met:

Your loan is secured by your main home (i.e., the home you live in most of the time).
Paying points is an established business practice in the area where your loan was made.
The points paid did not exceed the points generally charged in that area.
You use the “cash method” of accounting ― meaning that you report your income in the year it’s received and deduct your expenses in the year they are paid. (This is the most popular method of calculating individual income tax liability.)
The points paid were not for items that are usually stated separately on the loan settlement statement (e.g., appraisal fees, attorney fees, inspection fees, title fees, or property taxes).
The funds you provided at/before closing cannot be borrowed from your lender or mortgage broker. The funds, plus any points paid by the seller, were also at least as much as the points charged, although you do not have to have applied the funds you paid to the points. The funds can include a down payment, escrow deposit, or funds for any purpose that you paid at/before closing.
You use the loan to build or buy your main home.
The points were computed as a percentage of the principal amount of the mortgage.
The amount paid for points is clearly shown on the settlement statement. The points may be shown as paid from your funds or from the seller’s funds.

If you do not itemize deductions and your points do not meet the above conditions, you may spread out the tax deduction over the life of the loan. If you meet the above conditions and you itemize your deductions (in the same year your loan was obtained), you have the choice of spreading out the tax deduction over the life of the loan or deducting the full amount of points in the year they are paid.

Additionally, if you spread out this tax deduction over the life of the loan, and your mortgage ends earlier than the original loan term (because of refinancing or prepayment), you may deduct the remaining balance in the year your mortgage ends.

If you meet conditions 1 through 6 above, you may deduct the full amount of points in the year they are paid if your loan (or refinanced mortgage proceeds) is used for home improvement.

In many cases, you may be able to take advantage of the tax deduction for points paid. It’s a good idea to enlist a tax professional to help you determine if your mortgage points meet the deductibility criteria.

Tax Deductions for the Costs of Education

Everyone knows that education costs money and tuition is expensive. However, what everyone doesn’t know is that there are numerous education tax benefits made available by the federal government. Claiming an education tax credit or tax deduction on your tax return can help offset the high cost of education.

Here are some popular tax deductions for education:

The Student Loan Interest Deduction

The Student Loan Interest Deduction is an education tax benefit that allows taxpayers to deduct up to $2,500 of the interest paid on student loans. This education tax deduction can be claimed on your federal income tax return to reduce your taxable income.

Student loan interest is the interest that you paid during the year on a qualified education loan. You can deduct all the interest you paid on your student loan during the year, which includes voluntary interest payments.

You may claim the student loan interest deduction if you meet all of the following requirements:

Your filing status is not “married filing separately”
You (and your spouse if filing jointly) are not claimed as a dependent in the Exemptions section of another person’s tax return
You are legally obligated to pay interest on a qualified student loan
You paid interest on a qualified student loan

A qualified student loan, or education loan, is defined as follows:

A loan that you took out solely to pay for qualified higher education expenses
A loan that is used for an eligible student (you, your spouse, or your dependent) who is enrolled in a degree program at least half-time
A loan that is not from a relative or qualified employer plan

The amount of your education tax deduction is based on your income level. The maximum amount you can claim for the student loan interest deduction in 2009 is $2,500. The size of your tax deduction is gradually reduced if your modified adjusted gross income (MAGI) is between $60,000 and $75,000 (or $120,000 and $150,000 if filing jointly).

If your MAGI is $75,000 or more ($150,000 or more if filing jointly), you cannot claim this education tax deduction. Additionally, you cannot deduct the interest on a loan you get from a relative (such as your spouse, sibling, half-sibling, parents, grandparents, children, and certain organizations).

The following items cannot be claimed for a student loan interest tax deduction:

Interest that you paid on a loan if you were not legally obligated to make interest payments under the loan terms
Fees for lender services, such as loan origination fees and processing costs
Interest payments that you made through a loan repayment assistance program (such as the National Health Service Corps Loan Repayment Program, NHSC)

To claim the student loan interest deduction, you must include it as an adjustment to your income. (Note: you do not have to itemize your deductions for this education tax benefit.) The tax deduction can be claimed by entering the allowable amount of your deduction on Line 33 of IRS Tax Form 1040 (or Line 18 of Form 1040A; or Line 32 of Form 1040NR; or Line 9 of Form 1040NR-EZ).

Tuition and Education Fees Deduction

The “Tuition and Fees Deduction” is an education tax benefit that allows taxpayers a tax deduction if they paid the qualified education expenses for an eligible student (themselves, their spouse, or a dependent). It is an above-the-line deduction that may reduce your taxable income by up to $4,000.

You may claim the Tuition and Fees Tax Deduction if you meet all of the following requirements:

You pay the qualified education expenses of higher education
You pay the education expenses for an eligible student
The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return

You cannot claim the Tuition and Fees Tax Deduction if any of the following applies:

Your tax filing status is “married filing separately”
Another person can claim you as a dependent in the Exemptions section of his/her tax return (note that you cannot take this deduction even if the other person does not actually claim you as their dependent)
Your modified adjusted gross income (MAGI) exceeds $80,000 (or $160,000 if filing a joint tax return)
You (or your spouse) were a nonresident alien for any part of the tax year and did not elect to be treated as a resident alien for tax purposes
You (or anyone else) claims the American Opportunity Tax Credit, the Hope Scholarship Tax Credit, or the Lifetime Learning Tax Credit for qualified education expenses for the same student in the same year

The maximum amount you can claim for the Tuition and Fees Deduction in 2009 is $4,000 or $2,000, depending on your income level. If your MAGI is $65,000 or less ($130,000 if filing jointly), your maximum tax deduction is $4,000. If your MAGI is greater than $65,000 ($130,000 if filing jointly) but not more than $80,000 ($160,000 if filing jointly), your maximum tax deduction is $2,000. If your MAGI exceeds $80,000, you are not eligible this education tax benefit.

Qualified educational expenses include the following:

Tuition and related expenses required for enrollment at an eligible educational institution
Student-activity fees and course-related books, supplies, and equipment that are paid as a condition of attendance
Expenses that do not qualify for a Tuition and Fees Deduction include the following:
Insurance
Medical expenses (including student health fees)
Room and board
Transportation
Similar personal, living, or family expenses

An eligible student is one who is enrolled at a qualified educational institution, who has either a high school diploma or GED (General Educational Development) credential.

To claim this deduction, you must complete IRS Tax Form 8917 (Tuition and Fees Deduction) and submit that with your Form 1040 or Form 1040A.

Rules for Combining Education Tax Benefits

Note that there are specific rules regarding which education tax benefits may be used in the same tax year. Federal education tax deductions include the Tuition and Fees Deduction and the Student Loan Interest Deduction. Federal education tax credits include the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Hope Scholarship Tax Credit.

You cannot use the Tuition and Fees Deduction if you claimed a tax credit (American Opportunity, Lifetime Learning, or Hope) for education expenses for the same student in the same year.

However, the Tuition and Fees Deduction can be used in conjunction with some other education tax benefits, including tax-free distributions from Coverdell ESAs (Education Savings Accounts), qualified tuition programs, and education savings bonds. To take advantage of these education tax benefits simultaneously, different education expenses must form the basis for each separate benefit.

Tax Deductions for Donations to Charity

In general, cash and property donations to qualified charitable organizations are deductible on your individual income tax return. You may also carry forward excess tax deductions for 5 years.

However, if you receive something back in exchange for your donation (such as an item or service), you must reduce your tax deduction by the value of that item/service. For instance, say you donate $150 to a qualified charity and you receive a “gift” book that is worth $30 ― the amount of your total charitable tax deduction would be $120.

The Pension Protection Act of 2006 changed some rules for charitable tax deductions:

• Cash Contributions: To validate donations of cash/money, taxpayers must provide bank records or written acknowledgement from the charity, specifying the date of the donation, the amount of the donation, and the name of the charity.

• Noncash Contributions (clothing and household items): Noncash donations need to be in “good” condition. For donations over $500, additional information must be provided on the individual’s federal tax return. For noncash donations over $5,000 (not including publicly traded securities) and nonpublic stock worth over $10,000, certified appraisals are required.

The total charitable deduction on your tax return cannot be more than 50% of your AGI (adjusted gross income). Charitable contributions may be claimed on lines 16-19 of IRS Tax Form 1040, Schedule A.

Tax Deductions for Charitable Donations of Property

Donating appreciated property to charity is an often overlooked tax strategy. It allows taxpayers to deduct donated property that would otherwise be subject to capital gains tax.

Your property is appraised for tax deduction at its current market value, not what you originally paid for it. If a wise investment of yours has appreciated in value, and you are willing to part with it for a worthy cause, this is a good option.

Tax Deductions for Medical Expenses

Your medical expenses may be steep, but at least you have the option of deducting them on your tax return.

Fees paid directly to doctors, dentists, chiropractors, psychologists and practitioners of Christian Science
Hospital and nursing services
False teeth, wheelchairs, guide dogs, and laser eye surgery
Any prescription drugs, including those for nicotine withdrawal
Fare for an ambulance, taxi, bus, or train used for transportation to medical care, or mileage from your car at a standard mileage rate
The cost of participating in a weight loss program for obesity

Tax Deductions for Health Insurance

These days, health insurance is a fiercely debated issue in the United States. To offset the high cost of health insurance, there are some federal tax deductions that may benefit you.

If your employer provides group health care coverage, you are not required to pay taxes on the contributions to your health insurance premiums. If your employer does not provide medical coverage, a Health Savings Account (HSA) may be able to help you.

While medical expenses and health care expenses can be very steep, there is some tax relief available. Having a solid understanding of the possible tax benefits will help you make the most of your tax deductions.

Tax Deduction for Work-Related Educational Expenses

These days, more and more people are going back to school to improve their technical or professional skills, qualify for promotion or advancement, earn higher paychecks, or purely to enhance their quality of life. Claiming a deduction on your tax return for your work-related educational expenses may help offset the high cost of education.

There are a few rules regarding the tax deduction of work-related educational expenses. They are as follows:

• You must itemize deductions on your tax return (Form 1040, Schedule A) ― you cannot take the standard deduction. Taxpayers generally itemize deductions when they do not qualify for the standard deduction, or when their total number of qualified deductible expenses is more than the standard deduction. (The standard deduction is $5,700 for single filers and $11,400 for joint filers, for the year 2009.)

• When work-related educational costs are itemized, they are considered “miscellaneous” expenses and are subject to a 2% minimum ― only the amount of miscellaneous expenses that exceed 2% of your gross income can be deducted.

For expenses to be tax deductible, they must meet all of the following conditions (as stated by the IRS):

Your expenses must be for education that maintains or improves your job performance.
Your expenses must serve the purpose of your employer, and must be required by your employer (or by law) in order to keep your status, salary, or job.
Your expenses must be for education that is closely related to your current job skills. They cannot be used for an education program that will qualify you for a new trade or business.

Expenses that do qualify for a tax deduction include the following:

Tuition, supplies, books, lab fees, and other similar items
Certain travel and transportation
The cost of research and typing (when part of an educational program)

Expenses that do not qualify for a tax deduction include the following:

Expenses for the education needed to meet the minimum requirements of your trade or business
Expenses for a program that will qualify you for a new trade or business
Capital or personal expenses (e.g., the dollar value of vacation time or annual leave taken to attend classes)
Any expenses that qualify for reimbursement from your employer (even if you do not receive the reimbursement)

Those who are self-employed can report their educational expenses on Form 1040 Schedule C (Profit or Loss From Business), Form 1040 Schedule C-EZ (Net Profit From Business), or Form 1040 Schedule F (Profit or Loss From Farming).

Conclusion

It’s in your best interest to take advantage of every tax credit and deduction available to you. Understanding your financial position together with your personal situation will help you determine which tax credits and deductions you can benefit from.

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