Federal income tax deduction
The federal income tax deduction is a statutory requirement under the American laws. It has to be paid by all American citizens who fall under the tax bracket as decided by the American government. Taxable income is calculated by removing excluded income, exemptions, and permissible deductions from the individual’s gross income.
The following are the heads under which you can avail the tad deduction:
1. Exemptions: Some of the common exclusions from gross incomes are:
• Earnings made from life insurance contracts
• Earnings made from gifts and inheritances
• Proceeds granted for personal injuries
• Interest received from state and municipal bonds
It must however be noted that all of the above exemptions are subject to certain conditions, and thus a tax adviser’s help must be taken while availing these exemptions.
2. Deductions: In addition to the standard deduction, some common “above-the-line” deductions include:
• Trade/ Business expenses
• Alimony
• IRA contributions
• Net capital losses
• Expenses incurred due to property used for income generation
Income tax laws are not easy to understand. It is therefore always possible that individuals choosing the standard deduction may or may not be able to take advantage of other deductions.
3. The Standard Deduction: When individuals have minimal “below-the-line” deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows:
• Single $4,850
• Head of household $7,150
• Married filing a joint return $9,700
• Qualifying widow/widower w/ dependent child $9,500
• Married filing a separate return $4,850
4. Miscellaneous Itemized Deductions: These usually include:
• Interest paid
• Taxes paid
• Losses incurred
• Charitable contributions
• Medical costs borne
Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.
5. Alternative Minimum Tax: Alternative minimum tax is applicable if an individual’s taxable revenue is more than a predefined amount. In that case, the individual would otherwise pay negligible tax now has to shell out a certain amount, which lowers the advantages of certain deductions and credits.
6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:
• State and local income and property taxes
• Donations made to charitable organizations
• Employee transference expenses
• Medical expenses incurred
• Casualty losses
• Interest paid on mortgage