1. Medical expenses:
IRC Section 213 allows for the deduction of a wide range of medical expenses, including payments for medical and dental care, health insurance premiums and even a portion of long-term care insurance premiums. However, medical expenses are only deductible to the extent they exceed 10% of AGI in 2019, up from a 7.5%-of-AGI threshold in 2018.
2. Taxes paid to other governmental entities:
IRC Section 164 allows taxpayers to deduct for Federal tax purposes any taxes that were paid to other governmental entities, effectively ensuring that the individual doesn’t have to pay Federal taxes on the money they used to pay other taxes.
In practice, the deduction for taxes paid applies broadly to real estate, personal property and income taxes, whether paid to a state or local municipality, or even to a foreign government. That said, under the tax legislation and IRC Section 164(b)(6)(A), foreign real estate taxes are not deductible. However, the taxes-paid SALT deduction is limited under IRC Section 164(b)(6)(B) from 2018 through 2025 to only a $10,000 maximum deduction — and it’s the same $10,000, whether individual or married filing jointly.
3. Interest paid:
Under the general principle that borrowing money to make money should be treated as a cost of generating income — i.e., a deductible expense/cost of producing that income — IRC Section 163 allows a deduction for at least some types of interest paid. This includes not only interest paid for investment purposes — albeit limited the total amount of investment income generated from taxable interest and dividends in the first place — but also for mortgage interest paid on up to $750,000 of debt principal used to acquire, build or substantially improve a primary residence or designated second home, and even mortgage points that were paid out of pocket and not themselves financed.
We will discuss the next 3 deduction areas in next blogpost.