Taxpayers pay for a lot of things over the course of the year, and they would like to claim as many of their expenses as possible as deductions on their tax returns. Learning what types of expenses qualify for a tax deduction is important for new taxpayers and business owners when deciding how and when to spend money. The complete Form 1040 and the instructions for the associated schedules are the sources that describe and explain all of the deductions on a personal income tax return. Some of the main deduction areas are described in the rest of this post.
One of the major sources for deductions on a Form 1040 is Schedule A, Itemized Deductions. This contains items like taxes paid, interest paid, charitable contributions, medical expenses, and a variety of miscellaneous deductions. When preparing the 1040, the total of itemized deductions is compared to the standard deduction for the year, and the taxpayer can deduct the larger amount. Usually, home ownership is the event that moves someone from taking the standard deduction to itemizing deductions, as the real estate taxes and mortgage interest paid are often more substantial than any other possible deductions on the Schedule A.
There are some deductions available on the first page of the 1040. These are valuable because they are not subject to limitations or phase-out like itemized deductions. A few common deductions on this section of the tax return are student loan interest, tuition paid, and the self-employed health insurance deduction.
A few of the forms that allow business expenses are Schedule C, Schedule E, Form 8829, Form 2106, and Form 8903. Taxpayers that run a business, have a home office, or have unreimbursed expenses from their job should take time to read these forms and their instructions to find out what deductions are potentially available.
Some payments and expenses are generally never deductible on a tax return. These include life insurance premiums, personal gifts, political contributions, club dues, penalties and home repairs. Other payments are eligible for tax credits on page 2 of the 1040. These include items like childcare, foreign taxes paid, and amounts paid for higher education. Credits reduce the tax owed dollar for dollar instead of by the individual income tax rates, so they can be very valuable to taxpayers.
Learning what payments are deductible, nondeductible, or eligible for credits is beneficial when making financial decisions and preparing the annual income tax return. It allows for better tax planning and easier conversations with business advisers and tax professionals.
By Brandon Harbeke, CPA