Top Personal Tax Deductions
Don't overlook any of these personal tax deductions -- they make itemizing your deductions well worth it.
1. Mortgage interest and property taxes.
You can deduct the mortgage interest (not the principal) that you pay on a loan secured by your primary residence or a second home. To claim the deduction, you must be obligated to pay the debt and you must actually make the payments. You can also deduct any taxes you pay on real estate you own that is not used for business. If you have a mortgage on the property, the annual mortgage statement (Form 1098) you receive from the bank should includeboth the amount you paid in real estate taxes for the year and the interest and points you paid for the year (your mortgage interest deduction).
2. Charitable donations.
You can deduct any cash or noncash contributions you make to a qualified nonprofit organization. You are supposed to have documentation for any cash contribution, including contributions under $250. For all noncash (property) contributions and cash contributions over $250, you must have a receipt or acknowledgement from the nonprofit organization. For noncash (property) contributions over $500, you have to file an extra form with your tax return, Form 8283, Noncash Charitable Contributions.
3. Medical expenses and health savings accounts.
You can deduct the amount of your medical and dental expenses that exceed a certain percentage of your adjusted gross income. For many years, the percentage was 7.5%. In 2013, this percentage went up to 10% (except for people over 65 years old who are exempt from the increase until 2017). So if your AGI is $100,000, you can deduct your medical expenses only if and to the extent they exceed $10,000. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance for both you and your dependents. Unless your medical expenses are substantial, however, your medical expenses will probably fall below the AGI percentage limitation, meaning you won't be able to deduct anything.
If you have a qualified Health Savings Account (HSA), you can deduct your contributions to the account, and you don't have to pay tax on any interest you earn from the account. To establish an HSA account, you must have a high-deductible health plan that qualifies under the HSA rules. You can use money in your HSA account to pay almost any kind of health-related expense.
4. Child and dependent care.
If you have to pay someone to care for your child (under 13) or a dependent needing care so that you can work or look for work, you may be able toclaim a tax credit for those expenses. The credit is a percentage of your eligible work-related child or dependent care expenses, ranging from 20% to 35%, depending on your income.There is a dollar limit on the amount of expenses for which you can claim the credit. The limit is $3,000 of the expenses paid in a year for one person, or $6,000 for two or more. You must reduce these dollar limits by the amount of any dependent care benefits provided by your employer that you exclude from your income.
5. 401(k) and IRA contributions.
If your employer offers a 401(k), it pays to maximize your contributions, especially if your employer matches them. The maximum contribution is $18,000 (2016, 2015). If you are 50 or older, you can contribute an extra $6,000 per year.
For IRAs, you can contribute $5,500 (2016, 2015), and deduct that amount from your income. If you are 50 or older, you can contribute an extra $1,000.
6. Student loan interest.
You can deduct up to $2,500 in student loan interest payment per year, for the lifetime of the loan (income limits that apply). This Student Loan Interest Deduction was made permanent by tax legislation passed in January 2013.
7. Education expenses.
You may qualify for the American Opportunity Tax Credit worth up to $2,500, or the Lifetime Learning credit, worth up to $2,000, which are both for education expenses. Tax legislation passed in 2013 extended these tax credits through the end of 2017. A deduction of $4,000 (depending on your income) for tuition-related expenses expired at the end of 2013.
In addition, you can set up a Coverdell education savings account and contribute up to $2,000 per year (with phase-outs for higher income people). These contribution amounts were made permanent as part of the fiscal cliff tax legislation passed in 2013. The amount you contribute isn't deductible, but distributions from the account for payment of tuition are tax-free. You can also set up a state-sponsored college savings plan, known as a Section 529 plan, which allow tax-free withdrawals for qualifed college expenses.
8. Job expenses.
You can deduct education and training costs for your job if your employer doesn't reimburse you for them (and if the education is for your current job, not to get a better job later). Job-hunting expenses, including mileage, are also deductible.
9. Home office tax deduction.
If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, your mortgage or rent, and depreciation. For details about this tax break, see The Home Office Tax Deduction.