Lesson 11: Common Tax Deductions

As part of our comprehensive guide on Deductions and Credits, this lesson focuses on common tax deductions, providing insights to help you navigate the complexities of Federal Income Tax Law.

Understanding Tax Deductions

Tax deductions reduce your taxable income, which in turn lowers your overall tax liability. There are various deductions available, each with specific eligibility requirements and limitations.

Types of Common Tax Deductions

  • Charitable Contributions
  • Medical Expenses
  • Mortgage Interest
  • State and Local Taxes (SALT)
  • Student Loan Interest

Charitable Contributions

Donations to qualified charitable organizations may be deductible. This includes cash donations, non-cash contributions, and any expenses incurred while doing charity work. For more details, visit IRS Charitable Contributions. For some excellent reading, check out Federal Income Taxation by James J. Freeland.

Note: There are specific record-keeping requirements and limitations on the amounts that can be deducted.

Medical Expenses

Qualified medical expenses exceeding a certain percentage of your adjusted gross income (AGI) can be deducted. These include costs for diagnosis, treatment, prevention of disease, and premiums for medical insurance.


    
        Calculate total medical expenses.
        Subtract a percentage of your AGI (usually 7.5% as per recent tax law).
        The result is your deductible medical expense.

Mortgage Interest

Interest paid on a mortgage for your primary residence and a second home could be deductible. To understand more about mortgage interest deduction, refer to IRS Publication 936.

State and Local Taxes (SALT)

You may be able to deduct state and local income, sales, and property taxes up to a certain limit. This is commonly referred to as the SALT deduction.


    
        State and local income taxes
        Sales taxes
        Real estate taxes
        Personal property taxes

Student Loan Interest

Interest paid on qualified student loans may be deductible, subject to income limitations and other criteria. For more details, visit Lesson 14: Student Loan Interest.

Visualization of Common Tax Deductions

graph TD A["Common Tax Deductions"] -->|Qualified| B["Charitable Contributions"] A -->|Qualified| C["Medical Expenses"] A -->|Qualified| D["Mortgage Interest"] A -->|Qualified| E["State and Local Taxes (SALT)"] A -->|Qualified| F["Student Loan Interest"]

Formulas and Calculations

To better understand how deductions work, let's look at a simple formula for calculating deductible medical expenses:

Medical Deduction = Total Medical Expenses - 7.5% of AGI

For example, if your AGI is $50,000 and your total medical expenses are $5,000, the deductible amount is:

\[ \text{Medical Deduction} = 5000 - (0.075 \times 50000) = 5000 - 3750 = 1250 \]

Conclusion

Understanding and utilizing common tax deductions can significantly reduce your taxable income, leading to substantial tax savings. For more details on related topics, check our article on Standard Deduction vs. Itemized Deductions.

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