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!
