In our prior post, we highlighted the basics in how total gross income is calculated within the process of arriving at one’s taxable income. Essentially, gross income is calculated by including all of the income that you collect during the calendar year, including earned income through wages, benefits and overtime pay, as well as unearned income, which includes dividends, retirement benefits and Social Security disability payments.
However, one’s taxable income does not stop there. Taxpayers are allowed to reduce what their taxable income will be through deductions. They work basically like they sound. You are able to deduct money from your income to form the taxable basis. Deductions work in two ways: standard and itemized. This post will briefly explain both.
Standard deductions – This deduction represents the base amount of income that is not subject to tax. The standard deduction is based on the taxpayer’s filing status (married or single), whether they are disabled, or are claimed as a dependent on another person’s tax return. Most people take the standard deduction on many items because they do not have accurate records of every deductible expense over the year.
Itemized deductions – Like the standard deduction that is allowed, itemized deductions are available to compensate for every deductible expense by maintaining expense logs, keeping receipts and completing the long form 1040 and Schedule A. While this may seem to be the better way to reduce your income, your itemized deductions may be reduced because you may make too much money.
If you have additional questions about deductions, an experienced tax attorney can advise you.