How Tax Deductions Work


Examples of Tax Deductions
In most cases, you'll be able to deduct the entire amount of interest paid on your mortgage for the year. MariuszBlach/Thinkstock

Unfortunately, you can't just deduct whatever you want at any value. All deductions have restrictions. Here are some examples:

Health care expenses: Your out-of-pocket expenses must exceed 7.5 percent of your AGI before you can start writing them off.

You can also write off any preminums you bought through the Health Insurance Marketplace, under certain conditions.

Charity: You can deduct 50 percent or less of your charitable donations to public organizations, such as the American Heart Association, and 30 percent of your donations to private foundations, such as the Bill & Melinda Gates Foundation. If, however, you make contributions that can show capital gain, such as shares of stock, you are limited to 30 percent for public organizations and 20 percent for private organizations.

Earned Income Credit: This credit is limited by income level. If you're married, filing jointly and have three or more dependent children, you can claim this credit only if your income is $53,505or less. The maximum credit is $6,318.

And some deductions don't require you to itemize them to claim the deduction or credit. These include:

  • Moving expenses, if you're moving more than 50 miles to be closer to your job
  • Education: In addition to $2,500 of student loan interest, you can write off $4,000 in higher education expenses (tuition and fees). You may also be able to claim education credits like the Lifetime Learning or the American Opportunity Credits.
  • Educators' expenses: For example, a teacher who uses her own money to buy construction paper and markers for her classroom can deduct those expenses (maximum of $250 or $500 if both spouses are eligible educators).
  • Traditional IRA contributions, to a maximum of $5,500
  • Retirement withdrawal penalties: If you withdraw from your IRA account before the age of 59 ½, your withdrawal may be taxed at 10 percent .
  • Credits for self-employed workers: You can deduct half of your self-employment tax, health insurance premiums and contributions to some retirement plans, such as Roth IRAs, SIMPLEs or SEPs. Also, you can claim home-office deductions, such as a percentage of rent, electricity, and phone service, if these costs are business-related.
  • Child tax credit: You may be able to reduce the tax you owe up to $1,000 for each child under the age of 17.
  • Child and dependent care credit: This applies to each child (under age 13) or spouse or other person living with you that is physically or mentally handicapped, that you paid someone to care for.

To learn more about tax deductions and related topics, follow the links on the next page.

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