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What Is My Income Tax Deduction Based On?

Updated for Tax Year 2021 • January 10, 2022 04:19 PM


Tax deductions allow you to reduce the amount of your income that is subject to income tax. These deductions are based on a variety of factors. Some relate to expenses you pay during the year while others are fixed by the government and have no relation to any costs you incur. Since each deduction has different criteria, the amount you claim is also based on whether you can satisfy all of the requirements.

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Above the line deductions

The tax laws allow a number of deductions from your gross, or total, income to arrive at your adjusted gross income, or AGI. If you qualify for any of these deductions, they are generally deductible regardless of whether you claim the standard or itemized deduction. A couple of these deductions include student loan interest and deductible contributions to Individual Retirement Accounts (IRAs).

Often, these deductions are limited if your modified adjusted gross income amount is too high. In 2021 for example, you can deduct up to $2,500 of student loan interest payments if your MAGI is less than $65,000. Your MAGI equals the AGI you report on your tax return increased by the amount of your student loan interest deduction. In other words, it is what your AGI would be if you did not claim a deduction for student loan interest.

Below the line deductions

There are many deductions that are only available when you qualify to itemize. Many of these deductions will face separate limits that are determined by your AGI. For example, in most years, your annual charitable contribution deduction cannot exceed 50 percent of your AGI. However, in 2021, this limit has been increased to 100 percent of your AGI. A second example is your medical expense deductions you report as part of your itemized deductions. For 2021, these expenses are only deductible on the portion that exceeds 7.5 percent of your AGI.  Using your AGI as a limitation ensures that you cannot eliminate your entire tax bill through deductions.

Claiming exemptions

Through 2017, each dependent you claim on the return allows you to reduce your taxable income by a set exemption amount. For example, if during 2017 you have two minor children who reside with you and for whom you provide all financial support, claiming both of them as dependents allows you to take two exemptions. These exemptions work like deductions in that they reduce your taxable income by $8,100 ($4,050 for each child). However, you may not claim any dependents, even for your children, if you are eligible to be a dependent of another taxpayer.

Beginning in 2018, there are no longer any dependent exemption deductions. Instead, you can claim a credit for each person that is claimed as a dependent.

Your filing status and deductions

Every taxpayer who does not itemize their deductions is eligible to claim a standard deduction. Federal law determines the amount of these deductions each year and bases the amount you can claim on your filing status.

In 2021, if you file single or married filing separately and under 65 years of age, your standard deduction is $12,550; if head of household the amount increases to $18,800. If you are married and file a joint return, your combined standard deduction with your spouse is $25,100.

When evaluating whether to itemize your deductions instead of taking the standard deduction, you must compare your total expenses to the appropriate standard deduction amount for your filing status. If your itemized deductions exceed the standard deduction, then you can usually enhance your tax savings by itemizing and attaching a Schedule A to your tax return.

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