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Federal deductions help taxpayers reduce the amount of their income that is subject to federal income tax. There are many different types of federal deductions, and available options may change from year to year. Some of the most common types of federal deductions include options for homeowners or first-time home buyers, student loan borrowers, and those who make charitable contributions. Most taxpayers can also claim a standard or itemized deduction each year, which can reduce taxable income by a considerable amount.
Homeowners will sometimes be allowed to take federal deductions based on action taken with their property within the last year. Interest and tax payments on a mortgage, for instance, may be subject to deductions. Uninsured losses from natural disasters or accidents may also be subject to deduction, but only if the cost of the loss exceeds a certain portion of total income. Like all tax breaks, the available deductions for homeowners may change from year to year, so it is important to read current information on what deductions are available during each tax year.
People who are in repayment on student loans, or families that have dependent children repaying student loans, may be able to take federal deductions. Student loan deductions usually apply only to the interest paid during the year, not the amount paid on the principal amount of the loan. Students filing independently may be eligible to take some deductions on tuition and fees, but only if they decline available tax credits in the same category. Determining whether it is better to take the deduction or the tax credit will depend on the amount of tuition and the level of taxable income the student earns.
Charitable contributions can be a good way to increase federal deductions. Many charities maintain a tax status that allows contributors to deduct the value of their contribution, including cash or check contributions or the donation of goods, such as clothing, food, or vehicles. Most of the time, charitable contributions can only be deducted if the taxpayer opts to itemize deductions instead of choosing the standard deduction. Receipts and records must be maintained for any charitable contributions that are deducted, since the taxpayer will need to produce these documents for verification in the event of an audit.
Most taxpayers also have the option of claiming either standard or itemized federal deductions. These initial deductions help balance the tax burden against the current state of the economy, and may shift from year to year. The standard deduction is based on marital state and household size, though additional dollar amounts may be added for elderly or disabled filers. Itemized deductions are generally only advisable if the taxpayer has made a large number of expenditures or donations that can be deducted only through itemization. It may help to do the math on both types of federal deductions to determine which reduces taxable income by a greater amount.
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