If you're unfamiliar with deductions, it helps to understand the different deductions available to you.
Above-the-line deductions are deductions from your gross income. On your tax form, subtract the total above-the-line deductions from the gross income to get the adjusted gross income, or AGI. Everyone who fills out a Form 1040, whether they itemize or not, can claim above-the-line deductions.
A standard deduction is an amount of money the IRS allows you to subtract from your AGI based on your filing status. If you itemize, you don't claim a standard deduction. In 2007, the standard deductions were
- Single, or married filing separately: $5,350
- Married filing jointly, or eligible widow: $10,700
- Head of household: $7,850
Itemized deductions, like the standard deduction, are deductions from your AGI. Think of itemization as a type of receipt. Itemized deductions are simply things you paid for that have an effect on your tax status.
So if your combined itemized deductions are larger than the standard deduction you would normally claim, you should itemize. But if your combined itemized deductions are smaller than the standard deduction you would normally claim, you should just claim the standard deduction. The less you pay in taxes, the happier you'll be.
Here is a list of itemized deductions that can be included in your taxes:
- Job expenses that are not reimbursed by your employer: These include union dues, uniforms you're required to purchase and wear, and business-related vehicle expenses, such as gas and repairs.
- Student loan interest that your parents pay: If your parents don't claim you as a dependent, you can deduct up to $2,500 of the interest your parents paid on a student loan for you.
- Self-owned business: You can deduct office equipment, sales tax on business purchases, health insurance premiums, anything "necessary and ordinary" to perform your business.
- Hybrid car tax credit: The amount of the tax credit depends on the type of hybrid car you purchase or lease, and the credit is only available to the consumer that purchased the car.
- Charity: To see if an organization is eligible for a tax-deductible donation, check out the IRS's Publication 78.
- Casualty and theft: These deductions are applicable for an unexpected loss of property due to theft, fire, natural disaster and other unforseen circumstances.
- Home mortgage interest: In most cases, you'll be able to deduct the entire amount of interest paid on your mortgage for the year.
- State and local income or sales tax paid: Usually, deducting state income tax is better, but some states have sales tax and no income tax. You choose one or the other to write off.
- Personal property tax: These deductions are based on personal property taxed like boats or cars.
- Real estate taxes and points: A point is 1 percent of the value of a home loan. Banks charge you a fee to get a home loan. This fee is expressed in points, which you can write off.
- Gambling losses: If you win a big hand of Texas Hold 'Em, you can deduct any amount that you lost while playing, as long as the amount doesn't exceed how much you won. For example, if you lost $12,000 to card sharps, but you landed $10,000 with your four-ace hand, you could write off $10,000 in losses. Gambling includes lottery tickets.
While this list looks like it contains a lot of deductions, you can't deduct anything you want. Find out what limitations and restrictions exist around tax deductions on the next page. We'll also look at some other deductions that don't have to be itemized for you to get credit for them.