Tax deductions reduce your taxable income- which means a smaller tax bill! So, what is the best way to reduce your taxable income-a standard deduction or an itemized deduction? Let‘s find it out!
What are tax deductions?
A tax deduction refers to the amount that you are eligible subtract from your yearly income to determine the level of income on which you’ll pay taxes.
It is important for you to understand that all deductions reduce your taxable income, thus lowering the total amount that you owe to the government. It goes without saying that your income tax service can provide you with the best advice on tax deductions and that whether you should go for itemized deductions or standard deductions.
According to the Internal Revenue Service, most tax payers opt for standard deduction. The standard deduction amount is different for different filing statuses. For instance, it is higher for those who are aged 65 or older. These amounts are adjusted for inflation each year.
In simpler words, standard deduction is a fixed dollar amount that substantially reduces the amount of income that you are taxed on and according to your filing status; your standard deductions may vary. Standard deductions;
- Allows you a deduction even if you have no expenses that qualify for claiming itemized deductions.
- Eliminates the need to itemize deductions, such as medical expenses and charitable donations.
- Allows you to keep receipts and records of your expenses in case the IRS is auditing you.
In order to figure out whether itemized deductions are profitable for you, it is important for you to determine whether the allowable expenses you paid during the year for expenses such as property taxes, or sales taxes.
The rule for itemizing deductions on your income tax return is simple. If your total deductions are more than the standard deductions, you should itemize deductions. For every dollar that exceeds the standard deduction, you would be reducing your taxable income by that amount.
You might benefit from itemized deductions on Schedule A, if you;
- Have itemized deductions that total more than the standard deductions that you would receive.
- Had big, uninsured, medical expenses
- Paid real estate taxes and mortgage interest on your home
- Had a big, uninsured casualty
- Had big, unreimbursed miscellaneous expenses
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