A tax deduction is a reduction in an individual or company's taxable income. In turn, this reduction translates to a decrease in the amount of taxes owed to the federal government. A tax deduction may be a standard or an itemized deduction. A standard deduction is a certain amount of money that the IRS allows you to deduct from your Annual Gross Income (AGI), and this deduction is calculated based on your filing status.
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Itemized deductions are also deductions from your AGI. However, this tax deduction is more like a receipt. Itemized deductions are typically the result of expenses, some of which have been used to earn additional income. There are many types of expenses that are considered itemized deductions, including:
- Self-employed business expenses, such as office equipment, sales tax on business purchases, and other necessary business purchases
- Job expenses that your employer does not reimburse, including union dues and uniform costs
- Qualified charitable donations
- Student loan interest that your parents pay
- Gambling losses
- Home mortgage interest
- State and local income or sales taxes
If you claim any itemized deductions, then you do not claim a standardized deduction. This means that you should only claim itemized deductions if they are larger than the standard deduction that you would typically claim. Some individuals find it beneficial to speak with a tax processional in order to maximize their deductions.
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