Personal Tax Deductions: An Overview

It is It is possible to reduce your taxable income by taking a tax deduction, which lowers the total amount of tax you must pay. You can use itemized deductions, eligible expenses that taxpayers can claim on their federal tax returns, or standard deductions, a single fixed amount deduction. Before filing taxes, all taxpayers must decide whether to claim the standard deduction or itemize their deductions.

In 2021, the IRS processed 262.8 million tax returns and issued over $6.8 billion in tax refunds. Nearly 58 million taxpayers sought out assistance from the IRS office, and according to the 2021 Comprehensive Taxpayer Attitude Survey, 84 percent said it is unacceptable to defraud their income taxes, and 93 percent believe it is a civic duty to pay their fair share of taxes. Additionally,  over half of all taxpayers are satisfied with their interactions with the IRS. 

Regardless of your situation, you could be entitled to significant reductions to your annual taxed income, and it is crucial to decide the type of deduction you can claim based on your current situation.

Standard Deductions

The standard deduction is a portion of your income not subjected to taxes to reduce your total amount owed. Your standard deduction consists of the sum of the standard deduction amounts and any additional deductions for age and/or blindness. The standard deduction adjusts yearly and varies according to your filing status, whether you’re 65 or older and/or blind, and whether another taxpayer can claim you as a dependent. The maximum amount you can claim as an individual is $12,400. If you are married and filing jointly with a spouse, you may claim up to $24,800. However, the standard deduction isn’t available for certain taxpayers or if you itemize your deductions. 

Itemized Deductions

According to the IRS, itemized deductions are expenses that can reduce the amount of your taxable income and lower the total amount of taxes you owe. An estimated 30% of individuals use itemized deductions if their standard taxes are lower. 

The following section illustrates the different deductions that itemization offers. For more information, visit Expertise.com’s tax resource directory to speak with a tax specialist best suited for your personal needs. 

You may benefit from itemizing your deductions on Form 1040 if you:

• Had significant unreimbursed medical and dental expenses

• Do not qualify for the standard tax deduction, or the amount you can claim from the standard deduction is less than the standard deduction.

• Selected “Other Itemized Deductions” (line 16 on Form 1040).

• Gave significant contributions to reputable charities. 

• Paid real property taxes or mortgage interest on up to two homes.

State and Local Income and Sales Taxes

If you pay state and local taxes during tax season, make estimated tax payments to your state or local government, and withhold state or local taxes from your income, these payments qualify for the deduction. To be considered deductible, the tax must be imposed on you, and you must have paid during the tax year. You may deduct sales taxes instead of state and local income taxes, but you can’t deduct both. However, state and local taxes are capped at $10,000 until 2025.  

Please see your state’s taxation laws for more information on what state and local taxes you can claim on your tax return. 

Health Care Deductions

In most cases, individuals should claim their medical expenses deduction only if their itemized deductions exceed their standard deduction amount. You must use IRS Form 1040 and attach a Schedule A form to itemize your healthcare expenses. 

The following information regarding your healthcare expenses should be provided on your forms:

• The Schedule A form indicates the total amount of medical expenses paid throughout the year on line 1 and your adjusted gross income (as shown on your Form 1040) on line 2. 

• Enter 7.5% of your gross income on line 3. 

• Enter the difference between your medical expenses and the 7.5% of your gross income on line 4. 

• The results from line 4 will be added to any other itemized deductions and subtracted from your gross income to reduce your annual taxable income. 

• If the final amount and any other itemized deductions you’ve claimed are less than your standard deduction, then it is advisable not to itemize. 

Property Related Deductions

If you pay state or local taxes for any property you own, that property may be eligible for deduction. If you itemize your expenses, you can deduct property taxes on any real estate that you personally own. Real property refers to land and anything built on or attached to it. However, personal real estate is a property not used for business purposes. Remember that not every charge made on your property taxes is deductible. 

The following items are considered not deductible:

• Services fees, such as water and trash collection. 

• Charges made by the local government, for example, charges for front and back lawn maintenance when you do not comply with local mandates.

• Evaluations for improvements that can increase the value of your property, for example, replacing, building, or installing new assets (such as lamp posts, sidewalks, or any other intricate lawn or property fixtures). 

Mortgage Interest

Home mortgage interest is any interest you pay on a homeowner loan secured for your property. By itemizing, you can deduct the interest you pay for your mortgage from your taxes. However, the reduction is limited to accrued interest on up to $750,000 ($375,000 for married-filing separately status) of mortgage-related debt acquired after Dec. 15, 2017. In order to be eligible for a deduction, it is necessary to provide evidence of your ownership of the property, the distribution of funds, and compliance with all legal requirements at the local and state levels.

However, you cannot deduct your home mortgage interest unless you meet the following criteria:

• The mortgage is a secured debt (such as a mortgage, deed of trust, or land contract) on a determined home in which you have an ownership interest.

• You filed Form 1040 and itemized deductions on Schedule A.

• Both you and the lender need to indicate that the loan will be repaid.

Investment Related Deductions

Your investment income, defined as any dividends, interest, capital gains, or any other types of distributions, are expenses acquired to obtain investment property, and any expenses, to manage or collect income from these investment assets. 

If your investment expenses are less than your net investment income, then your investment interest is completely deductible. However, if the interest expenses are greater than the accumulated investment income, you have the option to deduct the expenses up to the net investment amount.

Claiming Your Deduction as a Charitable Donation

Generally, only legitimate organizations are eligible for taxable deductions. If you are unsure if a particular organization qualifies, please see the IRS’s guidelines for contributing donations. Individuals may deduct up to 30 percent of their total gross income. Gifts to/from individuals are not deductible.

Organizations listed below are considered legitimate under section 170(c) of the Internal Revenue Code:

• A church or other religious organization. 

• A corporation, foundation, or fundraiser organized in the United States and operated for charitable, religious, educational, scientific, and/or literary purposes or the prevention of cruelty to humans or animals.

• A civil defense organization or fund created under federal, state, or local law (including attorneys acting pro-bono and attributing the intent of their work to that of volunteer service).

• A war veterans' organization and/or monument, trust, or foundation organized in the United States. 

• Nonprofit organizations or services dedicated to the continued maintenance of cemeteries in their entirety.

• A fraternal organization operating through a lodging system. 

Work Related Deductions

A business expense must be either ordinary or necessary to qualify as tax-deductible. An ordinary expense is expected and needed within your industry. An essential expense is helpful and appropriate to conducting your or your company’s business. Whether you work for a company or are self-employed, you could deduct expenses for assets such as homes, automobiles, travel, or technology. 

However, the IRS has exacting standards for what qualifies as a work-related deduction. Taxpayers must provide “the time, date, and place of purchase, any receipts, and reasoning for its necessity.

Education Deductions

Eligible education expense deductions include amounts paid to cover tuition and fees or other expenses required for a student to enroll for the academic period starting during the tax year or the first three months of the next tax year. Eligible expenses include student activity fees, such as campus events or school transportation, that students must pay to fund on-campus student activities and support student organizations. 

However, certain expenses do not qualify for the deduction. The following are not qualifying expenses:

• Insurance

• Medical costs (including any student health fees)

• Personal transportation

• Expenses for sports games or non-credit courses

Claiming Your Expenses as Miscellaneous or “Other”  Itemized Deductions

The IRS defines miscellaneous expenses as deductions that do not easily fit into an existing tax category located on Form 1040 and Schedule A. Miscellaneous expenses are itemized deductions that would have been exposed to the 2 percent of your adjusted gross income or as an amendment to income on your Form 10400.  

These ‘other’ expenses can range from protecting you from a fraudulent exchange of goods or stock, impairment-related work expenses, and money or other assets lost from theft. However, you may not claim any miscellaneous deductions if you fall into one or more of the qualified categories of employment claiming a deduction relating to unreimbursed employee expenses. According to the IRS, “Taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator. They must complete Form 2106, Employee Business Expenses, to take the deduction.”

Can I Add Personal Deductions After I’ve Filed My Tax Return?

You can file an amended return if you need to adjust any information already filed on your tax return. The IRS may accept returns without certain forms or documents. However, you should file an amended tax return if there’s a modification in your income, filing status, deductions, credits, or any other impending liabilities. You can use Form 1040-X to document your necessary changes. 

Keep in mind that making an amendment may cause delays in processing your tax return. For more information on the status of your return, please refer to the “Where does the IRS provide My Amended Return?” page to track your return status.

Do I Need a Tax Attorney if I Didn’t Pay Personal Income Tax?

If you do not pay the tax you report on your return by the due date (or extended date if provided) or fail to pay taxes not reported on your return, you must pay a percentage of the taxes you did not pay. The IRS will send you a letter notifying you of this fact and provide you with crucial information about what to do next. The penalty is awarded based on how long your overdue taxes are unpaid. However, the penalty will be at most 25 percent of your due taxes. 

While the IRS is generally agreeable to making payment plans or reducing your tax liability, it is advisable to speak with an experienced tax attorney to protect your rights and assets. Tax specialists will assist in arranging your finances, ensure that you comply with taxation protocols, and mitigate disputes between you and the IRS. Please refer to Expertise.com’s directory of tax specialists for more information regarding your legal taxation rights.