Adjustments, Deductions, Exemptions and Credits
Before the government starts calculating you income tax, they allow everyone to deduct a certain amount first (they do recognize you need to eat before you pay taxes). This “deduction” really consist of 3 different pieces: adjustments, deductions, and exemptions (although most people tend to lump them together as “deductions”). Everybody gets an “exemption” of $4000. This is per person, hence the term “personal exemption”. Each taxpayer gets an exemption for himself and for each dependent he claims on his tax return. His spouse is not really a dependent but a 2nd taxpayer who also gets a $4000 personal exemption.
Every taxpayer then gets an actual “deduction” based on his filing status. A single person gets a “Standard” deduction of $6300 and a married couple get a Standard deduction of $12,600. So you see a single taxpayer really gets to “deduct” $10,300(4000+6300) before he starts paying any tax at all. Taxpayers who have certain types of personal expenses (mortgage interest, state & local taxes, medical expenses, and charitable gifts being the most common) may itemize expenses and if the total is more than the standard deduction they may take those “Itemized” deductions instead of (not in addition to) the standard deduction.
The 3rd category is adjustments to income. These are some times called “above the line” deductions because they are deducted in addition to the standard deduction, not instead of. Some common ones are IRA contributions, Alimony paid, Moving expenses, student loan interest and self employment taxes.
Everybody gets them, except somebody who is claimed as a dependent on somebody else's tax return. That person get's a reduced amount depending on the amount & source of his income. Somebody who is claimed as a dependent does NOT get their own exemption, because the person claiming them gets it instead.
Then there are Credits, which are deductions from your actual tax, not your income. Then there are Refundable credits, which the government will give you even if you have no calculated tax to deduct them from!
What are the 2018 caps for certain types of personal expenses (mortgage interest, state & local taxes, medical expenses, and charitable gifts)?
This year the Standard Deduction will be doubling so many people will be switching to the Standard Deduction. And there is a max 10,000 limit (5,000 MFS) of property tax and state taxes "SALT". SALT is State And Local Tax. Which includes property tax, any state tax paid like for last year’s return and includes any state withholding from your W2s and any 1099s you have. And any taxes in W2 box 14 and 19 like SDI or VDI. You can only deduct up to 10,000 (5,000 MFS) for SALT State and Local Taxes.
And you can only deduct Medical that’s over 7.5% of your AGI. Also the deduction for job expenses have been suspended.
FAQ on 2018 changes
And see Deductions that have been suspended for 2018
For 2018 the standard deduction amounts are:
Single 12,000 + 1,600 for 65 and over or blind
HOH 18,000 + 1,600 for 65 and over or blind
Joint 24,000+ 1,300 for each 65 and over or blind
Married filing Separate 12,000 + 1,300 for 65 and over or blind
If you are 65 or older you get an extra 1,300 each