7 Key Tax Deductions for Average Americans
As the April 18 tax deadline approaches, typical Americans are frantically searching for any way possible to reduce what they'll have to pay the IRS. Fortunately, there are many provisions of the tax laws that let you save on your taxes. In particular, there are seven deductions that help out millions of ordinary people and reduce the amount of tax they owe. Take a look and see how many of them you can take advantage of with your return.
1. The personal exemption
Personal exemptions are the most common deduction found on American tax returns, with nearly 138 million taxpayers, or about 93% of all returns, including amounts deducted using this provision. Nearly all taxpayers are entitled to take a personal exemption for themselves, and many can take additional exemptions for dependents for whom they provide support. The reduction is as much as $4,050 per exemption for 2016, making the deduction a valuable way to cut your taxes.
Image source: Getty Images.
2. The standard deduction
The standard deduction is also extremely popular, with more than 102 million taxpayers claiming the deduction. For the 2016 tax year, standard deductions for various filing statuses and other traits are listed below.
|
Filing Status |
Standard Deduction for 2015 Tax Year |
Additional Standard Deduction if 65 or older and/or blind |
|---|---|---|
|
Single |
$6,300 |
$1,550 |
|
Married filing jointly |
$12,600 |
$1,250 |
|
Head of household |
$9,300 |
$1,550 |
|
Married filing separately |
$6,300 |
$1,250 |
Source: IRS. Note: For those who are both 65 or older and blind, twice the additional standard deduction amount is available. For instance, for a single filer who is 65 or older and blind, the additional standard deduction would be $1,550 x 2 = $3,100.
One thing to remember, though, is that if you use the standard deduction, then itemized deductions aren't available to you. Typically, your decision to itemize will depend on whether you can get more deductions that way than if you just use the standard deduction.
3. Itemized deductions for state and local taxes
Close to 44 million American taxpayers paid state and local taxes on which they took an itemized deduction. State income tax and local real estate taxes were the most commonly claimed, but taxpayers have a choice between claiming state income tax or state sales tax paid as a deduction. In addition to real estate, state and local taxes on personal property are also eligible for deduction. Given the reality of double taxation at the federal and state level, it's good to be able to get at least some benefit from what you pay your state.
4. Itemized deductions for gifts to charity
More than 36 million taxpayers made charitable gifts for which they claimed itemized deductions. Most of those gifts were made either by cash or check, but more than half of tax returns that included charitable gifts also had in-kind donations of items like vehicles or clothing. The key for claiming charitable deductions is to be able to support your gifts through documentation from the charity that accepted your gift. That way, you'll be able to answer any IRS questions that come up.
5. Itemized deductions for mortgage interest
More than 32 million Americans took an itemized deduction for mortgage interest paid on their homes. The biggest portion of the deduction typically comes from the portion of each monthly payment that goes toward interest, but you can also sometimes deduct upfront points that you pay when you first get a mortgage. In addition, a temporary law has allowed mortgage insurance premiums to be deductible as if they were interest, but that provision was slated to expire for the 2017 tax year. Unless it's renewed retroactively, taxpayers won't be able to benefit from that added tax break when they file their taxes for 2017.
6. Miscellaneous itemized deductions for tax preparation fees
Almost 21 million Americans were able to claim a miscellaneous itemized deduction for what they paid to prepare their taxes. Amounts paid are deductible regardless of whether you hire a professional accountant or use tax software. However, what stops many people from benefiting from this provision is that you can only deduct miscellaneous itemized deductions that are over 2% of your adjusted gross income. Still, it's worth checking to see if you qualify.
7. Deductions for self-employed tax payments.
Those who are self-employed have to pay both the employer and employee portions of the Social Security and Medicare payroll taxes. However, half of that self-employment tax is deductible without even having to itemize your deductions. A surprisingly large number of people pay self-employment tax, with the total approaching 20 million taxpayers annually. The tax break is small compared to the additional self-employment tax owed, but it nevertheless provides at least some cushion to that tax blow.
Average Americans like you take advantage of many of these deductions to cut their tax bills. It's important to use them to maximum benefit in order to pay only what you have to pay to the IRS.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.