Understanding Common Tax Deductions for American Taxpayers

Understanding the tax deductions available can significantly reduce the amount of taxes you owe to the IRS. In the United States, there are two main types of tax deductions for individuals: the Standard Deduction and the Itemized Deductions. Let's explore both in detail.

Standard Deduction

The standard deduction is a fixed dollar amount that reduces the income you are taxed on. This deduction simplifies the tax filing process for most taxpayers as they do not need to list each eligible expense individually. The amount of the standard deduction varies based on the taxpayer's filing status, such as single, married filing jointly, head of household, etc.

A tax filer can choose to take the standard deduction if their eligible expenses do not exceed the fixed amount for their filing status. The standard deduction amounts can change annually, so it's always a good idea to check the latest IRS guidelines to ensure you are maximizing your deduction.

Itemized Deductions

For some taxpayers, itemizing expenses can result in a larger deduction. Instead of taking the standard deduction, these taxpayers choose to itemize their expenses. This involves listing all eligible expenses, such as those related to:

Mortgage Interest: The interest paid on your mortgage is a deductible expense, but only for the first $750,000 of the mortgage balance. This is up to $375,000 for new married couples. Property Taxes: Property taxes paid to local jurisdictions are deductible if they are borne by the taxpayer and not included in the mortgage interest on the deed. State and Local Taxes (SALT): Up to $10,000 of state and local income taxes and real estate taxes can be claimed as a deduction. Medical Expenses: Medical expenses must exceed 7.5% of the taxpayer's Adjusted Gross Income (AGI) to be deductible. However, for taxpayers 65 and older, the threshold is 7%. Charitable Contributions: Donations made to qualified charities are deductible, either in cash or in the form of property. Personal Property Taxes: Taxes assessed on personal property such as personal automobiles, artwork, and collectibles can be deducted if the taxpayer is personally responsible for the payments. Investment Interest Expenses: Interest paid on investments, such as those on margin loans, can be deducted.

For taxpayers who itemize deductions, it is crucial to maintain detailed records of all these expenses throughout the year. Filing Form 1040 Schedule A is required to report this information.

Additional Deductions

There are also above-the-line deductions that are claimed before the calculation of AGI. These include:

Teacher Expense Deduction: This deduction covers expenses incurred for educational materials purchased for use in the classroom as a teacher, professor, counselor, or administrator. Student Loan Interest Deduction: This deduction is available for qualified student loan interest paid during the taxable year. Tuition and Fees Deduction: This deduction covers qualified expenses for tuition at an eligible educational institution. Alimony Payments (up to 2018): Alimony paid under a divorce or separation agreement that is in effect during 2018 is deductible.

Retirement Savings Contributions

Contributions to retirement savings plans can also provide tax benefits. For instance, contributions to:

Traditional Individual Retirement Accounts (IRAs) 401(k), 403(b), and Thrift Savings Plans

These contributions are considered above-the-line deductions for AGI and may qualify for additional tax benefits depending on the filer's income and other factors.

Child-Related and Education Credits

For taxpayers with children, there are several credits available:

Child Tax Credit: This credit reduces a taxpayer's federal income tax liability by an amount per qualifying child. Child and Dependent Care Credit: This credit is available for the portion of a taxpayer's income spent on daycare or housekeeping services for dependent children under the age of 13 or incapacitated dependents. Other education credits include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). These credits are designed to help make higher education more affordable.

Business Expenses for Self-Employed Individuals

Taxpayers who are self-employed or run side businesses can also claim deductions for:

Home Office Deduction: If a portion of the home is used regularly and exclusively for business, the taxpayer may claim this deduction. Business Use of Your Car: Computed mileage for business use or actual car expenses can be claimed. Travel Expenses: Business travel expenses may be deductible depending on the purpose of the trip. Professional Fees: Fees for legal, accounting, and other professional services are generally deductible.

Health Savings Account (HSA) Contributions

Contributions to Health Savings Accounts are also tax-deductible and can be used for qualified medical expenses. This is particularly beneficial for individuals enrolled in high-deductible health plans.

Indian Tax Regimes: Old vs. New

For Indian taxpayers, the tax landscape is slightly different. The old regime offers more deductions but higher tax rates, while the new regime comes with very few deductions but lower tax rates. Recently, a detailed tax filing process for my son and me led to a significant difference in our tax liability under the two regimes, showcasing that choosing the right regime is crucial. It's always advisable to use tax calculation tools and consider both regimes to settle for the one that provides a lower tax liability.

I hope you find this overview helpful. If you're an American taxpayer, taking advantage of these deductions can significantly reduce your overall tax burden. For more updates and tips, please follow me!