Federal income tax deduction can provide handsome savings
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The federal income tax deduction is a statutory requirement under the American laws. It has to be paid by all American citizens who fall under the tax bracket as decided by the American government. Taxable income is calculated by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the individual's gross income.
The following are the heds under which you can avail the tad deduction:
1. Exemptions: Some common exclusions from gross incomes are:
i) Earnings made from life insurance contracts
ii) Earnings made from gifts and inheritances
iii) Proceeds granted for personal injuries
iv) Interest received from state and municipal bonds
It must however be noted that all of the above exemptions are subject to certain conditions, and thus a tax adviser's help must be taken while availing these exemptions.
2. Deductions: In addition to the standard deduction, some common "above-the-line" deductions include:
i) Trade/ Business expenses
ii) Alimony
iii) IRA contributions
iv) Net capital losses
v) Expenses incurred due to property used for income generation
Income tax laws are not easy to understand. It is therefore always possible that individuals choosing the standard deduction may or may not be able to take advantage of other deductions.
3. The Standard Deduction: When individuals have minimal "below-the-line" deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows:
i) Single $4,850
ii) Head of household $7,150
iii) Married filing a joint return $9,700
iv) Qualifying widow(er) with dependent child $9,500
v) Married filing a separate return $4,850
4. Miscellaneous Itemized Deductions: These usually include:
i) Interest paid
ii) Taxes paid
iii) Losses incurred
iv) Charitable contributions
v) Medical costs borne
Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.
5. Alternative Minimum Tax: Alternative minimum tax is applicable if an individual's taxable revenue is more than a predefined amount. In that case, the individual would otherwise pay negligible tax now has to shell out a certain amount, which lowers the advantages of certain deductions and credits.
6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:
i) State and local income and property taxes
ii) Donations made to charitable organizations
iii) Employee transference expenses
iv) Medical expenses incurred
v) Casualty losses
vi) Interest paid on mortgage
However, the individual can either avail standard deduction or itemized deduction.
Written by: the Editor
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