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2013 Personal Tax Deductions, Credits and Exemptions

According to the Government Accountability Office (GAO), failing to itemize is the single biggest mistake people make when preparing their taxes. Based on GAO studies, as many as 2.2 million taxpayers overpay their taxes by an average of $610 per year by failing to itemize their deductions.

So should you claim the simpler, no questions asked standard deduction, or spend the time to accumulate the information necessary to itemize? The answer usually depends on whether you own a home. Typically, mortgage interest and real estate taxes comprise the largest deductions for most homeowners and will generally exceed the standard deduction by themselves. The remainder of the itemized deductions that you may be entitled to claim is gravy. Think of your standard deduction as a floor – if you exceed it with specific allowable deductions, then itemize. Note, however, that for 2013, itemized deductions may be limited for high-income taxpayers.

It goes without saying that the lower your income, the less tax you will pay. Income minus tax deductions, credits and exemptions equals taxable income. If it were that simple, all tax returns would be self-prepared and you would not be reading this.

For various reasons (which we will not explore here), the Internal Revenue Code is not a walk in the park. We can, however, attempt to make your journey a little more tolerable. Let’s start by distinguishing between deductions, credits and exemptions.

Tax credits directly reduce your tax liability dollar for dollar; deductions reduce your income that is subject to tax. There are two types of deductions – those claimed to determine adjusted gross income (AGI) (“above-the-line”) and those claimed to arrive at taxable income (“below-the-line” or itemized deductions) – the “line“ being AGI. For example, an IRA contribution is claimed above-the-line; mortgage interest is deducted below-the-line. Why above-the-line deductions are usually more desirable than itemized deductions.

Taxpayers who do not itemize their deductions may instead claim a standard deduction for 2013 based on their filing status as follows:

  • Single and married filing separately – $6,100
  • Married filing jointly – $12,200
  • Head of Household – $8,950

Tax Credits

While a $1 tax credit is favorable to a $1 deduction, credits are worth the same to all taxpayers regardless of their tax bracket; whereas deductions become more valuable as the tax bracket increases.

There are two types of credits – refundable and nonrefundable. Refundable tax credits, such as the Earned Income Credit and the Additional Child Tax Credit, can produce a refund in excess of your actual tax liability. On the other hand, nonrefundable credits can only reduce your tax liability to zero. Most tax credits are nonrefundable (click here for a list of tax credits).

Exemptions

The personal exemption is the amount that each taxpayer can deduct in arriving at taxable income. On a joint return, a taxpayer can claim an exemption for himself and his spouse. A dependency exemption can also be claimed for each child or other qualifying dependent. The federal exemption is $3,900 for 2013 and is phased out for high-income filers.

In addition, certain types of income are tax-exempt, meaning that they are not included in taxable income. Examples include academic scholarships, portions of retirement and social security income, veteran and welfare benefits and municipal bond interest.

Hopefully, you now have a better understanding of the deductions, credits and exemptions available to you in order to avoid the tax pitfalls that the GAO claims traps so many.

2013 Personal Tax Deductions and Credits

The following list, while not all-inclusive, outlines many of the more common personal deductions and credits by type. For further information on any specific item, please see IRS Publication 17 or the instructions for Form 1040:


Above-the-Line Deductions

  • Items deducted to arrive at Gross Income –
    • Trade or business expenses
      • Reported on Schedule C
    • Rent and royalty expenses, including depreciation and depletion
      • Reported on Schedule C if personal property rental
      • Reported on Schedule E if royalty or real property rental
    • Loss from sales and exchanges
      • Reported on Schedule D if nonbusiness
      • Reported on Form 4797 if business
    • Net operating loss deduction
  • Items deducted to arrive at Adjusted Gross Income –
    • Contributions to traditional IRA’s
    • Contributions to SIMPLE, SEP and qualified plans
    • Alimony payments
    • Student loan interest paid
    • Contributions to health savings account
    • Moving expenses
    • One-half of self-employment tax
    • Self-employed health insurance
    • Penalty on the early withdrawal of savings
    • Up to $250 of educator’s expenses
    • Tuition and fees deduction
    • Certain business expenses of reservists, performing artists and fee-basis government officials
    • Jury duty pay remitted to your employer
    • Supplemental unemployment compensation repayments
    • Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
    • Domestic production activities deduction


Below-the-Line Deductions (Itemized Deductions)

  • Medical expenses – subject to 10% of AGI (7.5% if over 65 years of age)
    • Prescription medicine
    • Medical, dental and long-term care insurance premiums
    • Doctor, dentist, chiropractic, acupuncturist, therapist and psychologist fees
    • X-ray, laboratory and diagnostic testing
    • Nursing assistance
    • Hospital care
    • Medicare Part B supplemental and Part D insurance
    • Eyeglasses, hearing aids, braces, crutches, wheelchairs and guide dogs
      • Including the maintenance thereof
    • Lodging and travel in connection with medical care
  • Taxes
    • Option to claim sales taxes or state and local income taxes
    • Real estate taxes
    • Personal property taxes that are based on value alone on an annual basis
    • Foreign taxes paid (if foreign tax credit is not claimed)
  • Mortgage interest
    • A home mortgage is any loan that is secured by your main home or second home
    • Includes first and second mortgages, home equity loans, and refinanced mortgages
    • Limits –
      • $1.0 million of total principal to buy, build, or improve either or both homes
      • $100,000 of total principal for purposes other than to buy, build, or improve either or both homes
  • Mortgage insurance premiums
  • Investment interest
  • Charitable contributions
  • Casualty and theft losses – related to personal use property only
  • Miscellaneous deductions – subject to 2% of AGI
    • Unreimbursed job-related employee expenses
      • Equipment and supplies
      • Protective clothing
      • Home office
      • Vehicle
      • Union and professional dues
      • Professional and trade publication subscriptions
      • Continuing education and training
      • Portion of educator’s expenses in excess of $250 deducted for AGI
      • Job search
    • Other miscellaneous expenses
      • Income tax preparation fees
      • Audit fees
      • Investment and income-producing property expenses
        • IRA and other investment account maintenance fees
        • Legal, accounting and financial advice fees
        • Investment publication subscriptions
        • Margin interest
  • Other Miscellaneous deductions – not subject to 2% of AGI
    • Gambling losses to the extent of gambling winnings
    • Estate taxes on income
    • Casualty and theft losses – related to business and income-producing property


Refundable Credits

  • Additional Child Tax Credit
  • American Opportunity Credit (up to 40% refundable)
  • Credit for excess Social Security withholding
  • Earned Income Credit
  • Health Coverage Tax Credit

Non-refundable Credits

  • Adoption Credit
  • Alternative (Hybrid) Motor Vehicle Credit
  • Alternative Fuel Vehicle Refueling Property Credit
  • American Opportunity Credit
  • Child and Dependent Care Credit
  • Child Tax Credit
  • Credit for the Elderly and Disabled
  • Credit for Prior Year Minimum Tax
  • Foreign Tax Credit
  • General Business Credit
  • Lifetime Learning Tax Credit
  • Mortgage Interest Credit
    • limited to those with qualified Mortgage Credit Certificate
  • Residential Energy Credits
  • Retirement Savings Contributions Credit


Generally, above-the-line deductions are more desirable than itemized deductions because they:

  • can be claimed even if the taxpayer does not itemize deductions;
  • are not phased out or subject to a floor like many itemized deductions; and
  • lower the taxpayer’s AGI which can favorably impact –
    • the allowable portion of certain itemized deductions;
    • the taxability of social security benefits; and
    • the alternative minimum tax

Download Personal Deductions List (PDF)

 
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