What is a Tax Deduction?

As the tax deadline approaches, it’s natural to spend an increasing amount of time considering what counts as a tax deduction. Even if you’ve done your own taxes before in the past, now is a good time to ensure you’re familiar with the tax terms you’ll use during tax return preparation. A solid understanding of basic tax principles will help you whether you do your own taxes or hire a tax professional.

Function of a Tax Deduction

A tax deduction is an item that lowers the amount of your taxable income. When you’re in a tax system where your income determines the percentage of your overall tax liability – as is the case in the United States – claiming the correct tax deductions can help you save a substantial amount of money on your annual tax bill. Subtracting the total of your deductions from your income will help you find your Adjusted Gross Income (AGI).

Tax Deduction Types

A tax deduction can come in a number of forms. The most common tax deduction is the standard deduction. People also call this a personal exemption. For this deduction, the Internal Revenue Service (IRS) allows you to subtract a set amount from your gross income based on the way you file your taxes. These include:

• Head of Household
• Married Filing Jointly
• Married Filing Separately
• Qualifying Widow(er) with Dependent Child
• Single.

You also have the ability to replace your standard tax deduction with itemized deductions. To do this, you must use additional IRS tax forms to list out your various qualifying tax deductions. In some instances, the IRS will only let you claim an itemized tax deduction when it exceeds a certain percentage of your AGI.

Examples of itemized deductions may include:

• Charitable donations
• Education expenses
• Interest expense on qualified home loans
• Job hunting costs
• Medical expenses
• Mortgage interest
• Moving expenses
• Qualified retirement contributions
• State sales tax
• Tax preparation fees from the previous year.

Help Determining a Tax Deduction

Completing your taxes is not always a straightforward undertaking. Just because a tax deduction counts for one person does not mean you will also qualify to use it. Whenever you’re unsure how to proceed, it’s better to seek professional tax advice than to guess. If you’re in need of help preparing your taxes, you can contact:

• CPAs
• Tax accountants
• Tax preparation companies.

In addition, you may be able to find low cost or free tax preparation assistance in your area based on your income. The IRS website is another valuable free resource to determine if you qualify for a tax deduction.