The federal income tax deduction is a statutory requirement under the American laws. All American citizens who fall under this category have to pay this. Taxable income is calculated by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the individual's gross income.

The following are the heads under which you can avail the tax deduction:

1. Exemptions: Some common exclusion from gross incomes is:

I) Earnings made from life insurance contracts

ii) Earnings made from gifts and inheritances

iii) Proceeds granted for personal injuries

iv) Interest received from state and municipal bonds

certain conditions have to be kept in mind before availing these deductions.

2. Deductions: In addition to the standard deduction, some common ?above-the-line? deductions include:

i) Trade/ Business expenses

ii) Alimony

iii) IRA contributions

iv) Net capital losses

v) Expenses incurred due to property used for income generation

income tax laws are not everybody's cup of tea and so should be handled with care.

3. The Standard Deduction: When individuals have minimal ?below-the-line? deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows:

i) Single $4,850

ii) Head of household $7,150

iii) Married filing a joint return $9,700

iv) Qualifying widow(er) with dependent child $9,500

v) Married filing a separate return $4,850

4. Miscellaneous Itemized Deductions: These usually include:

i) Interest paid

ii) Taxes paid

iii) Losses incurred

iv) Charitable contributions

v) Medical costs borne

Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.

5. Alternative Minimum Tax: applicable when minimum tax revenue is less than the predetermined amount. the individual would now be paying a very negligible tax and helps him in saving some money.

6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:

i) State and local income and property taxes

ii) Donations made to charitable organizations

iii) Employee transference expenses

iv) Medical expenses incurred

v) Casualty losses

vi) Interest paid on mortgage

However, the individual can either avail standard deduction or itemized deduction.

the best alternative in understanding such a complex structure is to catch a person who knows the tax structure better and let him do all the work, but keep your eyes and ears open.