Taxable income deductions are yearly expenses that can reduce a taxpayer's obligation. These expenses are approved by federal and local governments and usually become a part of the tax code. The types and amounts of expenses that taxpayers can deduct from their taxable income may change from one year to the next, depending on tax law modifications. Deductible expenses can include mortgage interest, student loan interest, donations made to charity, and self-employment tax.
When individuals calculate whether they paid the government enough taxes during the past year, they use taxable income deductions to reduce the amount of income they are required to pay taxes on. These deductions are usually expenses that the government views as having a negative impact on an individual's disposable income. For example, in the United States the federal government allows self-employed individuals to deduct half of their self-employment tax. Unincorporated business owners are usually responsible for the full amount of their Social Security and Medicare taxes, whereas employed individuals have the benefit of sharing these costs with their employers.
Expenses related to basic needs, such as housing and medical care can be considered taxable income deductions. Interest charges and loan origination costs on a mortgage are usually taken as itemized deductions since the amounts may exceed the government's standard deduction. Some federal governments pre-figure a standard deduction amount for taxpayers who may not incur a significant amount of qualified expenses. Interest charges on government issued debt and sales taxes on vehicle purchases are other examples of possible deductions.
Another type of taxable income deductions includes charitable contributions that exceed a certain amount. Donations to charity in the form of money or personal belongings are eligible for deduction in some countries since the taxpayer is essentially reducing his disposable income. Examples of eligible donations may include used vehicles, clothing, and furniture. These expenses usually have to be itemized and backed up with a receipt or donation voucher.
Most federal governments recommend that taxpayers keep documentation that can prove the amounts of any itemized taxable income deductions. Since government tax agencies may randomly audit individual tax returns to prevent fraud and abuse, claiming expenses that can't be substantiated can lead to severe consequences. It is important to understand any tax code changes since the expenses that qualify for deduction can be modified each year. For example, some federal governments have implemented a tuition expense deduction up to a certain amount during specific tax years.
