Exclusions

• Some deductions are taken out of your paycheck, so the income used to pay for those deductible expenses isn't reported to the IRS or on your tax return. For example, if you make pretax contributions to a 401(k) plan or pay health insurance premiums through your employer or make contributions to a flex account for health care, your W-2 will not show those contributions as taxable income. Interest from municipal bonds is not subject to federal income tax, either.
  
  

Dependents

• If you have children, you can claim a deduction for dependents. In 2009, you received a deduction of $3,650 for each child you could claim as a dependent. To qualify as your dependent, the child must by 19 or younger unless he is a full-time student, in which case the age limit is 24. The child must live with you at least half the year and cannot pay more than 50 percent of her expenses on her own.
  
  

Tax Credits

• Tax credits are more beneficial than tax deductions because they decrease your tax liability rather than your taxable income. For example, a tax credit of $1,000 would decrease the amount of tax you owe by $1,000, while a tax deduction would merely decrease your taxable income by that amount.
  
  Examples of tax credits include the following: a $1,000 tax credit per child for taxpayers below a certain income threshold; an energy-efficiency credit, which allows a credit of 30 percent of the purchase price of energy-efficient items for your home, such as doors and windows; and the Hope and Lifetime Learning Credit, which allows a credit for expenses incurred for higher education.
  
  

Above-the-Line Deductions

• Above-the-line deductions are those you can take in addition to the standard deduction to determine your adjusted gross income. These include deductions for contributions to traditional IRAs and health savings accounts, alimony payments, student-loan interest, tuition expenses and moving expenses.
  
  

Itemized Deductions

• Only about one-third of Americans itemize the deductions on their taxes. Reasons most people don't itemize include not having enough itemized deductions to surpass the amount given for the standard deduction (you can't take the standard deduction if you itemize) and the extra work involved. Itemized deductions must be calculated on Schedule A.
  
  Common itemized deductions include gifts to charity, mortgage interest and medical expenses. Mortgage interest on the first $500,000 of your mortgage is deductible; the limit rises to $1 million if you file a joint return. Only the amount of medical expenses that exceeds 7.5 percent of your adjusted gross income are deductible.