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If you're like most Americans, then you probably never look forward to the tax season. Whether we hate paying the IRS or not, unfortunately we must pay taxes. However, to make the process a little easier, this article gives you information on different types of taxes, expenses and deductions, so that you can diminish the amount of taxes and lower your tax liability.
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Standard Tax Deduction vs. Itemized Tax Deductions
When filing your taxes, you are given the discretion of choosing two types of deductions. They are: standard tax deductions or itemized tax deductions. Basically, standard tax deductions are preset deductions that are already predetermined by the IRS. The deductions will vary depending on the your filing status, and is indexed for inflation yearly. On the other hand, the itemized deduction is dependent on the amount of specified expenses incurred by the taxpayer. Of course, some limits will apply and vary depending on each specific deduction. Moreover, itemized tax deductions allow the taxpayer to take “below-the-line" deductions, which are deductions from adjusted gross income (AGI). Based on the taxpayers paid expenses, the amount of the deductions can vary and exceed the standard tax deduction, when compared. That's why it is highly recommended that the taxpayer check their itemized deductions against their standard deductions in order to determine which deduction will be more considerable.
Specifically, deductions are dependent on the following filing status:
- Head of Household
- Married Filing Jointly or Qualified Widower
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Overview of Itemized Deductions
- Charitable Contributions - Any cash or non-cash items can be deducted. Such items include new and used clothes, jewelry, cars, household goods, etc.
- Medical and Dental Expense – Any non-reimbursed medical and dental expenses.
- Job Expenses and Certain Miscellaneous Fees - Vehicle expenses (except for commuting), continuing education, union fees, and non-reimbursed job-related expenses.
- State and Local Income Tax - Income tax, sales tax, and property tax.
- Casualty Losses - Theft, fire, storm damage, or casualty can be deducted if the item was non-reimbursed.
- Miscellaneous Expense - Gambling losses, deposit box fees, tax preparation fees, decedent's investment in a pension or estate tax on income for a decedent.
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Overview of Above-the-Line Tax Deductions
The IRS allows certain types of deductions to be subtracted from taxable income before your AGI is calculated. If you qualify – even if you don't itemize - then you are able to take the following above-the-line deductions:
- Tuition and Fees - Qualified educational expenses
- Military Reservist - Non-reimbured expenses for reservists who travel more than 100 miles and must stay the night away from home
- Student Loans Interest - Interest accrued on student loans
- Traditional IRA Contributions - IRA contributions
- Moving Expenses - Moving you and family members to a new location because of a current job
- Contributions to HSA - Health savings accounts
- Alimony - Paid alimony
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Above-the-line Deductions for Self-Employed
When considering taxes, expenses and deductions, here are some above the line deductions for the self-employed:
- Health Insurance Premiums -100% of health insurance premiums for you and your family
- Self-Employment Tax - 50% of your social security and Medicare tax
- Retirement Plans - Contributions made to retirement plans such as SEPs and SIMPLE plans
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If you are considering preparing your own tax returns, there are many online tax companies that will allow you to prepare your tax return for free. Usually, they will request that you answer several questions regarding your taxes, expenses and deductions, and will select all of the deductions that apply to your situation. Whether you prepare your taxes on your own or select a tax preparer, make sure that they are comparing your standard tax deductions against your itemized tax deductions. This will insure that you will receive the best possible tax deduction, thus diminishing your tax liability.
- Money Smart Life - http://moneysmartlife.com/medical-expenses-income-tax-deductions/
- H&R Block - http://www.hrblock.com/taxes/tax_tips/deductions_credits/overlooked_deductions.html?ttiptitle=Deductions
- Investopedia - http://www.investopedia.com/terms/a/above-the-line-deduction.asp and http://www.investopedia.com/articles/taxes/08/itemized-deductions-overview.asp