Part 1 - Individuals - Deductions And Credits

The Deduction and Credits section of the exam tests the candidate's knowledge of the various deductions and credits that can be claimed on individuals' tax returns. Deductions and credits may help to reduce a taxpayer's overall tax liability and include retirement deductions, itemized deductions and various credits.

Itemized Deductions 
Taxpayers can take the standard deduction on their federal income tax returns or can choose to itemize deductions. Taxpayers generally itemize deductions only if the outcome is more favorable than taking the standard deduction. Itemized deductions are made on Form 1040 Schedule A. The IRS determines which deductions are allowed and limitations for each. Enrolled Agents should have a thorough understanding of deductions and limitations including:

  • Medical and dental expenses 
  • Taxes paid – state, local, real estate taxes, personal property taxes other
  • Interest paid – home mortgage and points, mortgage insurance premiums, investment interest, etc.
  • Gifts to charity – gifts by cash or check, non-cash, documentation required
  • Casualty and theft losses 
  • Job expenses and miscellaneous deductions – unreimbursed employee expenses (job travel, union dues, job education, etc.), tax preparation feeds, safe deposit box, etc.
  • Other miscellaneous deductions
  • AGI limitations 
  • Allowable itemized deductions for Form 1040NR

Credits
Credits reduce tax liability dollar-for-dollar and have a greater impact than deductions. The laws regarding tax credits do change and certain tax credits may be available only for a limited time. In addition, certain tax credits may only be claimed once (or up to a certain amount) during a specified period. Enrolled Agents should be aware of the credits that taxpayers currently may be able to subtract from their income tax returns, including:

  • Adoption credits
  • Child and dependent care
  • Child tax credits
  • Education
  • Foreign tax
  • Mortgage interest
  • Earned income tax credit (treated as a payment)
  • Retirement contribution credit
Taxation And Advice


Related Articles
  1. Taxes

    Top Tax Deductions Not to Overlook

    If you want to pay as little as possible in taxes, it's important to learn about all the different credits and deductions available. Here's a primer.
  2. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.
  3. Taxes

    How To Get The Most Money Back On Your Tax Return

    Many people pay more taxes than they have to simply because they don’t know better. Here are a few suggestions for getting the most out of your tax return.
  4. Taxes

    Calculating The Mortgage Interest Tax Deduction

    While the mortgage interest tax deduction is a cherished American tax break, it’s perhaps the most misunderstood aspect of homeownership.
  5. Economics

    What's a Deductible?

    With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
  6. Taxes

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  7. Taxes

    Tax Deductions Vs. Tax Credits

    Understanding the difference between tax deductions and credits is crucial, as the tax strategies that you adopt now can favor one over the other and yield substantially different tax savings.
  8. Financial Advisors

    How to Deduct Medical Insurance Premiums

    An overview of tax breaks for those who pay medical insurance premiums.
  9. Taxes

    The Most Controversial Tax Deductions

    When it comes to taxes, it's hard to make people happy but these deductions raised more than the average amount of controversy.
  10. Taxes

    Don't Miss These Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
RELATED TERMS
  1. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  2. Itemized Deduction

    A deduction from a taxpayer's taxable adjusted gross income that ...
  3. Above The Line Deduction

    Above the line deductions are certain types of deductions that ...
  4. Foreign Tax Deduction

    One of the itemized deductions that may be taken for taxes paid ...
  5. IRS Publication 936

    A document published by the Internal Revenue Service (IRS) that ...
  6. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
RELATED FAQS
  1. How do I know whether to itemize deductions or take the standard deduction?

    Taking the standard deduction is the easiest and most common method chosen by filers, but many taxpayers may wind up paying ... Read Answer >>
  2. How is the deductible I paid for my insurance claim treated for tax purposes?

    Find out how your health insurance deductible is treated for tax purposes and under what conditions you may be able to deduct ... Read Answer >>
  3. What is the difference between a write-off and a deduction?

    Understand the differences between a tax write-off and a tax deduction. Learn how each one works to reduce income taxes and ... Read Answer >>
  4. Which is better for tax deductions, itemization or a standard deduction?

    Each deduction that you claim may result in a decrease in the amount of taxes that you owe. However, whether you receive ... Read Answer >>
  5. What are the deductions taken to determine AGI (adjusted gross income)?

    Read more about the deductions taken to arrive at adjusted gross income, or AGI, including the differences between above ... Read Answer >>
  6. How can I make sure I'm ready to file my taxes?

    Whether you file your return yourself, or have it done by a tax professional, you want to make sure you include all your ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center