The federal tax law allows you to deduct several different personal expenses from your taxable income each year. This can really pay off during tax season because the reduction to taxable income reduces the amount of income that is subject to federal income tax. However, not all expenses you incur will provide tax savings; the Internal Revenue Code is very specific about the types of expenses you can deduct and the taxpayers who may claim them.
The IRS allows all taxpayers who do not itemize deductible expenses to claim the standard deduction. The government sets the standard deduction amount every year for each filing status. For example, in 2018 the government authorized a $12,000 standard deduction for single taxpayers, $18,000 for those who file as head of household and $24,000 for married couples filing a joint tax return.
So, if you are a single taxpayer who earns $100,000 during the year, the standard deduction reduces your taxable income to $88,000. However, this amount is subject to further reduction by other allowable deductions you claim.
Above the line deductions
Personal income tax returns require the calculation of Adjusted Gross Income (AGI) before arriving at the final taxable income amount. The deductions you may take to arrive at AGI tend to be less restrictive than below-the-line deductions since their limitations have no relation to your AGI.
As an example, the student loan interest deduction allows you to deduct the interest paid on qualified student loans provided you meet the deduction-specific requirements. Similarly, the qualified self-employed health insurance payment are fully deductible irrespective of your AGI.
Below the line deductions
Deductions you take below the line reduce your AGI. Many of these deductions have varying limitations that directly relate to the amount of AGI you report. Most below-the-line deductions relate to the expenses you itemize on the Schedule A attachment to your personal income tax return. Some common itemized deductions include medical and dental expenses and charitable contributions.
The medical expenses you can deduct only include the portion that exceeds 7.5 percent of your AGI for 2017 and 2018. Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their AGI.
Taxpayers who elect to itemize deductions are precluded from also claiming the standard deduction.
Small business deductions
If you operate a small business as a sole proprietor, you must incorporate business earnings into your personal tax return by preparing a Schedule C attachment. The Schedule C is a separate calculation of your net profit or loss that requires you to report all business income and deductions.
As a small proprietor, you can take any business deduction on the Schedule C that is available to all other types of businesses. The deductions you may be entitled to include employee salaries, advertising expenses, office rent and most other reasonable expenses that solely relate to the business.
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