Federal Income Tax Deduction
The American laws are great fun to play with if you know how to
handle them, but better be sure you know the rules, or else you
fall into trouble.
The federal income tax deduction is a statutory requirement
under the American laws. All American citizens who fall under
this category have to pay this. Taxable income is calculated by
removing (a) excluded income, (b) exemptions, and (c)
permissible deductions from the individual's gross income.
The following are the heads under which you can avail the tax
deduction:
1. Exemptions: Some common exclusion from gross incomes is: I)
Earnings made from life insurance contracts ii) Earnings made
from gifts and inheritances iii) Proceeds granted for personal
injuries iv) Interest received from state and municipal bonds
certain conditions have to be kept in mind before availing these
deductions. 2. Deductions: In addition to the standard
deduction, some common "above-the-line" deductions include: i)
Trade/ Business expenses ii) Alimony iii) IRA contributions iv)
Net capital losses v) Expenses incurred due to property used for
income generation
income tax laws are not everybody's cup of tea and so should be
handled with care.
3. The Standard Deduction: When individuals have minimal
"below-the-line" deductions, they are directly granted a
standard deduction. The standard deduction under different heads
in 2004 was as follows: i) Single $4,850 ii) Head of
household $7,150 iii) Married filing a joint return
$9,700 iv) Qualifying widow(er) with dependent child $9,500 v)
Married filing a separate return $4,850
4. Miscellaneous Itemized Deductions: These usually include: i)
Interest paid ii) Taxes paid iii) Losses incurred iv) Charitable
contributions v) Medical costs borne
Such miscellaneous deductions are permissible if and only if
they surpass 2% of adjusted gross income.
5. Alternative Minimum Tax: applicable when minimum tax revenue
is less than the predetermined amount. the individual would now
be paying a very negligible tax and helps him in saving some
money.
6. Itemized Deductions: The alternative to the standard
deduction is itemized deductions. For the year 2004, the major
items included in itemized deductions were:
i) State and local income and property taxes ii) Donations made
to charitable organizations iii) Employee transference expenses
iv) Medical expenses incurred v) Casualty losses vi) Interest
paid on mortgage
However, the individual can either avail standard deduction or
itemized deduction.
the best alternative in understanding such a complex structure
is to catch a person who knows the tax structure better and let
him do all the work, but keep your eyes and ears open.