Great Savings With Federal Income Tax Deductions

Under American law, federal income tax is a constitutional requirement. It must be paid by all American citizens who fall under the tax bracket as the American government decides. You can calculate taxable income by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the person’s gross income.

Below are some of the heads under which you can ask for the tax deduction:

1. Exemptions: Some common exemptions from gross incomes are:

i) Earnings from life insurance contracts
ii) Earnings from gifts and inheritances
iii) Proceeds granted for personal injuries

iv) Interest on state and municipal bonds

Note however that all the above exemptions are conditional, and therefore you must ask for a tax adviser’s help when asking for these exemptions.

2. Deductions: As well as the standard deduction, some other common “above the line” deductions include:

i) Trade/ Business expenses

ii) Alimony

iii) IRA contributions

iv) Net capital losses

v) Expenses arising due to property which was used for generating income

It is difficult to understand income tax laws. Therefore, people choosing the standard deduction might or might not be able to make the most of other deductions.

3. Standard Deduction: When individuals have minor “below-the-line” deductions, they will be directly allowed a standard deduction. This standard deduction under different heads in 2004 was as follows:

i) Single $4,850

ii) Head of household $7,150

iii) Married filing a joint return $9,700

iv) Qualifying widow(er) with dependent child $9,500

v) Married filing a separate return $4,850

4. Miscellaneous or Itemized Deductions: These usually comprise:

i) Interest paid
ii) Taxes paid
iii) Losses incurred
iv) Charitable contributions
v) Medical costs

These miscellaneous or itemized deductions are allowed if and only if they exceed 2% of the adjusted gross income.

5. Alternative Minimum Tax: Alternative minimum tax can be applied if an person’s taxable revenue exceeds a predefined amount. In this event, the individual who would otherwise pay negligible tax now has to come up with a certain amount, which will lower the benefit of certain credits and deductions.

6. Itemized Deductions: An substitute to the standard deduction is itemized deductions. For 2004, the main items included in itemized deductions were:

i) Local income and State property taxes

ii) Donations made to charitable organizations

iii) Employee transference expenses
iv) Medical expenses

v) Casualty losses

vi) Interest on mortgage Nevertheless, the person can either benefit from standard or itemized deduction.

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