How Tax Deductions Work

Examples of Tax Deductions
On January 25, 1995, President Bill Clinton spoke at Kutztown University in Pennsylvania about education and training tax deductions
On January 25, 1995, President Bill Clinton spoke at Kutztown University in Pennsylvania about education and training tax deductions

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.

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 two or more dependent children, you can claim this credit only if your income is $38,348 or less.

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 the Hope Credit and Lifetime Learning Credit.
  • 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).
  • Traditional IRA contributions, to a maximum of $4,000
  • Retirement withdrawal penalties: You can arrange a penalty-free withdrawal from a retirement account before the age of 59 ½, but have to pay it back in five years to avoid a higher penalty.
  • 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.
  • Energy credits for buying energy-saving equipment, such as solar panels, or making energy-saving home improvements
  • 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-care credit: This applies to each child under the age of 13 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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