When it comes to filing your taxes, deductions can be a powerful ally in helping you pay less to Uncle Sam when the bill is due. But some taxpayers are still a bit clueless as to how a deduction works and when it makes sense to itemize those for which they may qualify or simply claim the standard amount offered each year under the IRS code.
If you're unsure as to how this all works, fear not. We're here to help!
What is a Deduction?
A deduction is a specific dollar amount that can be applied to your adjusted gross income (AGI) for the purpose of lowering your taxable income. This is helpful because when you have less income to be taxed at your applicable rate, your tax bill is reduced.
So it stands to reason that the more deductions you can claim, the more money you get to keep in your pocket. You want to qualify for as many deductions as possible or claim the standard deduction provided under the tax code.
Qualifying is relatively straightforward as a deduction is given to those taxpayers who incurred specific expenses during the year.
These expenses can be anything from moving expenses to medical bills to childcare costs to student loan interest to property taxes, just to name a few. If you had these types of expenses throughout the filing year, you may qualify for the corresponding deductions. If you have a tax preparer helping you file, they will identify all of the deductions you may be eligible to claim.
But whether you're getting professional help or doing it all on your own, you will need to decide between claiming the many deductions to which you are entitled or claiming the standard amount.
Standard Deduction
You don't need to be an expert accountant to understand how this type of deduction affects your tax return. It's very simple, the IRS offers a standard dollar amount that is applied to your taxable income in order to reduce what you owe. The amount you may claim depends upon your filing status:
Single/Married Filing Separately: $6,350
Head of Household: $9,350
Married Filing Jointly: $12,700
Taxpayers who don't want to find a tax preparer to file their return will likely take the standard deduction because it's easy to claim. There is no need for complex book-keeping because you have nothing to prove with respect to receipts on your qualifying expenses, as is the case when you itemize.
Just subtract whichever of those dollar amounts applies to your filing status and you're done. Any tax preparer will advise you that this is the best way to go if your expenses for the year don't surpass the amount offered in the standard deduction.
Ask an Accountant
Sounds almost too easy, right? Well there is a catch when it comes to the standard deduction. It may not always be the best option based on your filing status. Those who are married filing separately may be prohibited from taking the standard deduction if their spouse has chosen to itemize on a return.
Your specific financial situation plays into the decision as well, with certain itemized deductions that are too lucrative to pass up based on how much you might be paying in mortgage interest or property taxes. Your accountant will be able to assist you in deciding which option is best.
Itemized Deductions
Now here is where you may want to find a tax preparer or accountant who can help you claim all of the deductions you are entitled to take. Itemizing means you will catalog all of your qualifying expenses and costs on your Schedule A in order to get the most value towards reducing your taxable income.
Good Book-keeping Practices
But you better keep an eye on your book-keeping because if you claim a long list of eligible deductions, you could run into an audit from the IRS. So you will need to have all of the corresponding receipts and paperwork to prove that you did indeed incur these costs over the course of the year.
The main reason for itemizing has to do with the value of your collective deductions being higher than the standard amount available in your applicable tax bracket. Without the proof to back it up, however, you may just want to go with the standard deduction instead.
Flynn Financial Group Inc