Introduction
In the US, there is an income tax system that was instituted by the government. The objective of this system is to help the government in the collection of revenue from the public. Amongst the component of the income tax are the itemized deductions. These are items that are listed separately from the individual’s tax adjusted gross income. The itemized deductions results into reduction of the taxable income.These include items such as interest expense, medical cost and contribution to charitable organizations. The objective of this discussion is to illustrate how these components form a part of the itemized deductions.
Tax deductions have a positive impact on the individual’s income. There are various components that form part of the itemized deductions and include the following
Interest deductions
Interest refers to the sum amount that an individual pays upon utilization of borrowed money (Rande, 2004, para.1). In order for one to deduct the interest from borrowed money so that it can add up to the individual’s tax return, one must be liable for the debt legally. This means that one must be able to itemize his tax deductions on his tax return. Tax deductions on interest expense consist of six main components. These include the interest on investment, home mortgage, business, passive activity, student loan and personal interest.
Investment interest refers to all the interest that an individual incurs in the process of buying an investment property. This interest is categorized as an itemized and hence it is tax deductible on the tax return. The investment income is tax deductible only to a limit of the individual’s net income from the investment. This means that the tax deduction on investment interest cannot exceed the net investment income. Any excess amount that is left is passed on to the future without expiry.
In order to determine the investment interest that is tax deductible, one has to determine the net investment income. This is done through addition of the interest income that is taxable, ordinary dividends and the capital gains. From this all the investment miscellaneous itemized deductions are subtracted (Rande, 2004, para.9).
Passive activity refers to all the activities that are related to the conduct of the business in which the owner is not materially involved. It also includes all the rental activities. However if the individual is involved in rentals of real estate, this activity is not considered as being passive unless it meets certain characteristics. This includes active participation and the providence of service to the real estate that is approximately 750 hours annually (Rande, 2004, Para, 10).The passive activity interest deduction is limited to the losses incurred through passive activity.
On the other hand, interest on home mortgage refers to the interest that an individual pays in relation to a loan that is secured on the individual’s home. This may be the main home, second mortgage or a loan on home equity. In order for the interest on home mortgage to be categorized as tax deductible, they must meet certain criteria. These include a loan that was taken on 13th October 1987; other loans after this date to either improve or build a home. These two must have totaled one million dollars or below by 1999.The others include the home equity mortgages which were taken after the above date but not related to building or improvement of the home. They must have totaled $ 100, 000 or below by 1999.
Medical costs
The costs incurred by an individual in as a result of medical activities are also characterized as itemized deductions and they add up to the tax returns. In US, the total medical expenditure of an individual is estimated to be approximately 7.5% of the individual’s gross income upon adjustment. According to the Internal Revenue Service (IRS), there is a possibility of an individual increasing his deductions from the medical cost (Kay, 2009, Para. 6). This is through consideration of various medical costs. These include the traveling expenses, insurance payments, and cost of other treatment programs.
The travelling cost includes the cost incurred on travelling to get medical services. This is calculated in terms of the mileage. This is due to the fact that there are times when the cost of fuel rises which means that the cost incurred is much higher.
If the individual has an insurance policy, it means that he will pay the premiums from an amount that is already taxed. For instance, the insurance policy may be related to long term care in relation to an individual’s age. All this cost is included as a medical cost and is tax deductible.
There are other medical costs that an individual incurs and are not covered by the insurance policy. This cost is recouped through their inclusion in the itemized deductions. For instance; an individual with problems of the eyes may require another set of eyeglasses or an artificial limb. There are other special medical costs that are also categorized as itemized deductions. These include the cost of acquiring medical facilities such as wheel chairs, crutches and the equipments that have the capacity of enabling a deaf person to hear and use a telephone (Kay, 2009, para.11).
Charitable contribution deductions
Charitable contribution deduction refers to an itemized deduction on the taxable income that is in form of donations to the Internal Revenue Service. These donations are designated to certain qualified organizations. (Charitable contribution deductions, 2009, Para 2-5)
These donations are either in the form of money or property. For these donations to be itemized deductions, an individual is required to include them during the tax year in which they were donated.
If an individual donates an asset other than cash, he is required to include the fair market value of that property as part of the itemized deductions. Certain properties donated appreciate in value. In such cases, there is need to determine the value of the amount of appreciation and making the necessary adjustments. The amount of contributions to charitable organizations is limited up to 50% of the adjusted gross income. The 50%limit is for the public organizations while to private organizations is 30% (Charitable contribution deductions, 2009, Para 5).
Conclusion
Tax on an individual income can have a significant effect on the net income. Despite this there are various ways in which an individual can reduce the tax charged. This is through various deductions that result to increase in the individual’s tax returns. These include the interest expense deductions such as interest on investments, home mortgage, student loans and also the personal interest.
Other deductions may result from medical cost incurred. Alternatively, there are certain contributions that are in form of donations to certain organizations that can form part of the deductions.
All these itemized deductions are up to a certain limit.
Recommendation
Individuals should consider ways on how to increase his tax deductions. Some of the ways in which an individual’s taxable income can be exempted of the tax end up benefiting the individual. For instance; through investment, and individual is able to make capital gains. This means that his living standards will be increased and at the same time he will be exempted a certain percent of tax payable.
Bibliography
Debra, H.O& Ben, S.(20005)maximizing the tax deduction for Income in respect of decedent. The CPA journal.vol.4, issue 2, pp.3-4.New York: New York State Society of CPA’S. Web.
Internal Revenue Services (2009).Charitable contributions deductions: Publications 78.
Help, Part II. Web.
Kay, B. (2009) Getting the most from itemized deductions. Bankrate.com. Web.
Pope, Anderson, Kramer (2009)Federal Taxation: itemized Deductions. Prentice-Hall: Pearson Education Incorporation. Web.
Rande, S (2004) Investment expenses :What is tax deductible. Journal of financial planning. Schwab Center for Financial Research.