Five Most Common Tax Deductions

Don't miss out on these five most common tax deductionsIt's rare that the decision to itemize or take the standard deduction hinges on some of the smaller deductions that you can claim on your federal form 1040, Schedule A. This is because the deduction thresholds are fairly high. For 2010, the standard deduction for married couples filing a joint return is $11,400. The standard deduction for individual taxpayers and married couples filing separate returns is $5,700. The standard deduction for heads of household is $8,400.

With numbers like those, big ticket items tend to drive the decision of whether to itemize. To help you figure out whether itemizing makes sense for you, here's a list of five of the most common itemized deductions:

1. Home Mortgage Interest. You can generally claim the home mortgage interest deduction for interest you pay on a loan secured by your home. The loan must be on your main home or a second home and includes a mortgage, a second mortgage, a line of credit or a home equity loan. You must have an ownership interest in the home (meaning that you can't take the deduction for paying the mortgage for a home owned by someone else) and you must be obligated to pay the loan.

If you pay $600 or more of mortgage interest during the year on a mortgage, your lender will generally issue a form 1098, which shows the total interest paid during the year, the amount of any mortgage insurance premiums paid and, if you bought your home during the year, the deductible points paid during the year, including seller-paid points. Those amounts are generally deductible to you. Be aware, however, that income limits and other restrictions may apply.2. Charitable Donations. If you donate money or goods during the year to a qualified charitable organization, you're generally entitled to a charitable deduction. If you give property to a qualified organization, you generally can deduct the fair market value of the property at the time of the contribution. Rules vary depending on what you donate (cash is the easiest to substantiate) and, in some cases, where you donate. It's also important to understand that your deduction for charitable contributions is generally limited to 50% of your adjusted gross income (AGI), but in some cases 20% and 30% limits may apply. Check with your tax adviser for information specific to your own circumstances.

3. Income Taxes Paid. You can deduct state and local income taxes paid during the year with one important exception: You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. Your state and local taxes don't have to be paid in one lump sum; you can also deduct withheld taxes and estimated tax payments. You may not deduct federal income taxes paid, nor can you deduct employment taxes that were withheld, including Social Security, Medicare and Railroad Retirement taxes.

4. Real Estate Taxes Paid. You can claim a deduction for real estate taxes on any state, local or foreign taxes on real property so long as they are based on the assessed value of the real property. This means taxes charged for local benefits and improvements that increase the value of the property aren't deductible; similarly, state and local fees for services like trash pick-up and mowing along the road or homeowner's association fees (even if mandatory) aren't deductible.

If you opt to have your real estate taxes paid together with your mortgage, the amount paid will generally be reported on your form 1098 (see #1 above). Otherwise, the amount of your deduction will the amount paid by check or other cash equivalent during the tax year.

5. Medical and Dental Expenses. You can deduct expenses for the diagnosis, cure, mitigation, treatment or prevention of disease. This generally includes the costs of physicians, surgeons, dentists and other medical practitioners as well as medical equipment, supplies and diagnostic devices prescribed by a physician. Deductible medical expenses also include the cost of health care insurance premiums and the costs of getting to and from your appointments. You can find a more extensive list of deductible expenses here.

It's important to note that medical expenses must be for an actual diagnosed condition. You can't deduct the cost of expenses that are just beneficial to your health like vitamins or preventative care not diagnosed by a physician, such as diets just to feel and look better.

Covered expenses included those you pay for yourself as well as those you pay for someone who was your spouse or your dependent either when the services were provided or when you paid for them.

Most importantly, medical and dental expenses are subject to the "7.5% limit." That means you can only deduct those expenses which exceed 7.5% of your adjusted gross income (AGI). For example, let's say your medical and dental expenses are $5,000 for the year and your AGI is $40,000. You can only claim a deduction of $2,000 ($5,000 in expenses less 7.5% of your AGI, or $3,000).

If you might be able to claim one or more of these common tax deductions this tax year, itemizing might make sense for you. Run the numbers and see how it adds up -- these deductions could put extra money in your pocket.

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