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How Tax Deductions Work

Claiming Tax Deductions

US Tax Forms
Above-the-line deductions are deductions from your gross income JByard/Thinkstock

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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 tax year 2019, the standard deductions were:

  • Single, or married filing separately: $12,200
  • Married filing jointly: $24,400
  • Head of household: $18,350

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. There is no limitation on the amount of itemized deductions you can take thanks to the Tax Cuts and Jobs Act of 2017. However, your personal exemption was eliminated by the same act.

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.
  • Charity: To see if an organization is eligible for a tax-deductible donation, check out the IRS's Tax Exempt Organization Search.
  • 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: You can deduct up to $10,000 ($5,000 if married filing separately) of state and local income, sales and property taxes.
  • 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 play casino games, lotteries or other forms of betting you can write off your losses, but the amount cannot exceed what you are reporting as income from gambling. For example, if during the tax year you lost $12,000 but also won $10,000, you could write off $10,000 in losses. You can't deduct the other $2,000 – and if you had a really bad year and only lost money gambling, you can't just write off your losses without reporting any gambling income. You do need to keep a diary showing how much you won and lost and where and when you gambled.

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.

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