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  • Various Tax Deductions Allowed In USA
Various Tax Deductions Allowed In USA

Various Tax Deductions Allowed In USA

Taxpayers have seen their options for tax deductions whittled down in recent years, as the vast majority of taxpayers opt for the standard deduction – which doubled in 2018 – rather than itemized deductions. Still, deductions are a powerful way to lower your tax bill. Let’s take a look on various types of Tax Deductions allowed in USA.

What is a Tax Deduction?

A tax deduction lowers your taxable income and thus reduces your tax liability. You subtract the amount of the tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill.

Categories of Tax Deductions

 1. The Standard Deduction-

The standard deduction is by far the most common route for taxpayers. This deduction is a set amount, which is adjusted each year and determined based on factors like a taxpayer’s filing status. Every year, we look at the standard deduction compared with the itemized deduction, and we’re always going to take what’s bigger. You don’t have to lock in to one or the other. Every year can be different.

Here are the Standard Deduction amounts for 2021 (taxes filed in 2022) for reference:

 

Filing Status Standard Deduction For 2021
Single $12,550
Married Filing Jointly $25,100
Head of Household $18,800
Married Filing Separately $12,550

 

Taxpayers who are over 65 or blind receive an additional deduction of $1,350 and an additional $1,700 for those individuals who are also unmarried and not a surviving spouse.

2. Itemized Deductions-

Itemized deductions are qualified expenses subtracted from a taxpayer’s adjusted gross income. Individuals who itemize are often homeowners and high-income earners.

i. Charitable Contribution Deduction-

Filers interested in donating to charity can use these contributions to boost their deduction amount.

ii. Mortgage Interest Tax Deduction-

For debt accrued after Dec. 15, 2017, taxpayers can deduct home mortgage interest on their first $750,000 or $375,000 of mortgage debt for married filing separately. For home loans taken out before Dec. 15, 2017, the previous maximum of $1 million or $500,000 if married filing separately still applies.

iii. Medical Expenses Tax Deduction-

Qualified health care expenses may be subtracted from a taxpayer’s adjusted gross income as itemized deductions. These might include costs for diagnosis, treatment or prevention of a disease but do not include unnecessary procedures like cosmetic surgery.

iv. State and Local Tax Deduction-

Filers can deduct taxes paid in 2021 up to $10,000 or $5,000 if married filing separately for state and local taxes.

v. Property Tax Deduction-

One popular state and local tax deduction is that for a filer’s property tax. This deduction applies to taxes on real estate property, like a home, and personal property, like a car or boat.

3. Schedule 1 Deductions-

Even if a taxpayer doesn’t itemize deductions, there are some other deductions they may utilize. Previously called “above-the-line” tax deductions, taxpayers can take certain deductions on the 1040 Schedule 1 form.

i. Alimony-

Taxpayers can deduct alimony payments for divorce agreements dated before Dec. 31, 2018.

ii. Educator Expenses-

Taxpayers who work as educators in schools can deduct up to $250 of unreimbursed expenses.

iii. Health Savings Account Contributions-

A health savings account, or HSA, is a dedicated health care savings account for individuals enrolled in a qualified high-deductible health insurance plan. This account receives special tax treatments, including the option to deduct contributions, which are limited to $3,600 for single filers and $7,200 for families in 2021.

Consider taking advantage of this deduction if you contributed to your HSA directly. If you fund an HSA through your employer, your contributions may be deducted directly from your paychecks instead.

iv. IRA Contributions-

Individuals who make traditional IRA contributions, which are subject to income and participation requirements, can deduct some or all of the amount of their contribution limit. Both IRA contributions, however, are not deductible.

v. Self-employment Deductions-

Taxpayers who are self-employed can take advantage of a number of deductions, such as a deduction for health insurance premiums and the deductible part of self-employment taxes. Those who opt for itemized deductions or additional deductions must be prepared for an audit.

vi. Student Loan Interest-

Borrowers who paid interest on a qualified student loan in 2021 can deduct the lesser of $2,500 or the amount of interest actually paid during the year. However, this deduction is gradually reduced and eventually eliminated as a taxpayer’s modified adjusted gross income reaches the annual limit.

vii. Charitable Contributions-

Taxpayers can deduct charitable contributions to qualified organizations of up to $300 for single filers and $600 for married filers.

New Tax Deductions

Married taxpayers can enjoy a larger charitable contribution deduction, even if they opt for the standard deduction. The charitable contribution deduction remains the same for unmarried taxpayers.

Conclusion

As we see, there are various types of Tax Deductions allowed in USA. We need to know the detailed information about the same deductions. As tax deductions helps us to reduce our tax liability. So, we need to be updated with the various tax deductions announced by the Government time to time.

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