• The IRS is aggressive about collecting income tax on discretionary income. But their intent is to tax only net income after legitimate business expenses, not gross income. Furthermore, Congress has deemed it in the public interest to encourage you to save for retirement and education, and to provide for your own medical expenses. As such, the IRS has provided a number of tax deductions to encourage you to to set aside money for these goals.
  
  

Retirement Plans

• Depending on your income and whether or not you are covered by a retirement plan at work, you can make tax-deductible contributions of up to $5,000 to an individual retirement account (IRA), or up to $16,500 into a 401k or 403b plan (numbers current as of 2010). Congress has also set up the SEP, or Simplified Employee Retirement Plan and the SIMPLE plans to provide additional retirement options for small-business owners and their employees. Generally, contributions to these plans are tax-deferred, gains are tax-deferred, and withdrawals are taxed as income. A penalty may apply to withdrawals prior to age 59 and a half.
  
  

Education

• You can make tax-deductible contributions to a Section 529 plan, which allows you to save tax-deductible dollars for the college education of yourself or a loved one. Growth is tax deferred, and withdrawals for qualified higher education expenses are tax-free. Otherwise, they are taxed as income, and an additional 10 percent penalty may apply. There are no income limitations. Each state has its own version of the Section 529 plan. You don't have to use the plan in your state, but your state may offer a state income-tax deduction if you use your states' plan.
  
  

Health Savings Accounts

• Generally, you may deduct contributions to a health savings account (HSA), provided you established the account with a high-deductible health plan. Assets in the HSA grow tax-deferred, and they are tax free when you use the money for qualified health-related expenditures.
  
  

Health Insurance

• Generally, premiums you pay into a group plan are made pretax. Effectively, they are deductions, since you never pay tax on that income. You don't have to itemize to claim health insurance deductions as an employee, since your employer does it for you on your W-2 form. Generally, if you are self-employed or not covered by a health plan at work, you may also deduct your own health insurance premiums for you and your family.
  
  

Yourself and Your Dependents

• As of 2010, you can claim the standard deduction of $5,700 for yourself and $11,400 for a married couple filing jointly. You can also claim a $3,650 dependency exemption for any dependents.
  
  

Business Expenses

• If you are self-employed, you can deduct legitimate business costs, such as travel, equipment, computers, membership dues and marketing and advertising expenses. As of 2010, you can deduct 50 cents per mile for unreimbursed business travel in your own vehicle. You may also deduct 50 percent of business meals and entertainment expenses.
  
  

Home Mortgage Interest

• You can deduct the interest on a home acquisition mortgage on a primary residence. In most cases, you can deduct the interest on acquisition mortgages up to $1 million, or $500,000 if you are married and file separately. You can also deduct the interest on a "cash-out" refinancing. If you aren't borrowing to acquire or substantially improve a primary residence, you can deduct the interest on up to $100,000 of home equity debt, or $50,000 if you are married and file separately.