University:
Central Arizona College
Course:
ACC121 | Income Tax Fundamentals
Academic year:

2023
Views:

290

Pages:

2
Author:

Lucas H.

Deductions and Losses Understanding Deductions ● deductions are reductions of the gross income which in effect, lowers the amount of income to be taxed. ● They occupy special positions with regard to the taxable income and, therefore, the amount of tax. The Internal Revenue Code (IRC) offers a variety of deductions, which can be divided into two main categories: The legal and proper ways of avoiding taxes are above the line deductions or adjustments to income and below the line deductions which entails itemized deductions and standard deductions. Above-the-Line Deductions ● Above-the-line deductions are claimed on the first line of the Schedule A form before arriving at Adjusted Gross Income (AGI); they are available to every taxpayer, including those taking the standard deduction. Some common above-the-line deductions include: 1. Contributions to Traditional IRAs: Deduction on deposits made to a conventional IRA is subject to the conditions that include the income level of the taxpayer and his or her participation in other retirement cases. 2. Student Loan Interest: This form of expenses is allowed to be deducted from the total tax amount that a person pays to the government, the limit being set by income level; interest on qualified student loans. 3. Health Savings Account (HSA) Contributions: One can contribute to an HSA, and the payment made towards the HSA is also tax-deductible while the amount in the HSA can be used to pay for qualified medical expenses. 4. Self-Employment Tax: Any independent contactor or freelance worker is allowed to deduct the employer’s share of the self-employment tax. Below-the-Line Deductions ● below-the-line deductions are those that are claimed after arriving to the adjusted gross income or AGI and includes the decision on whether to take the standard deduction or itemized deduction. Standard Deduction: - The standard deduction is an agreed amount which when claimed, cuts down the amount of income that will be taxed. - This amount is different with the filing status, for example, single, married filling jointly, head of household among others and this amount is subject to be adjusted with effect from time to time of the fiscal year. - Nobody would itemize because it is time-consuming, and you will end up with a smaller deduction than when one uses the standard deduction.

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