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Tax deductions can reduce taxable income and lower the amount of tax owed. Understanding the criteria for common deductions helps taxpayers maximize their benefits and ensure compliance with tax laws.
What Are Tax Deductions?
Tax deductions are expenses that the government allows taxpayers to subtract from their gross income. They decrease the taxable income, which can result in a lower tax bill. Common deductions include mortgage interest, charitable contributions, and medical expenses.
Criteria for Deductible Expenses
To qualify for a deduction, an expense generally must meet certain criteria:
- The expense must be **ordinary and necessary** for your trade or business or for producing income.
- The expense must be **paid or incurred** during the tax year.
- The expense must be **not prohibited** by law or specifically disallowed.
Common Deductible Expenses
Some of the most common deductions include:
- Mortgage interest
- State and local taxes
- Charitable donations
- Medical and dental expenses
- Educational expenses
Documentation and Record-Keeping
Proper documentation is essential for claiming deductions. Keep receipts, bank statements, and records of expenses. Accurate records help substantiate deductions if audited by tax authorities.