During the holiday season it is not very common to think about one’s tax return. Indeed, in our prior post we warned against the seduction of tax refund anticipation loans, but that’s arguably the only way taxpayers are thinking about their returns. But for those who want to be savvy and informed, it is important to know what deductions are and how they work.
Essentially, deductions work to lower one’s taxable income. The more deductions that are applied, the lower one’s taxable income becomes. The lower one’s taxable income is, the lower the tax bill will be. Deductions basically work in two ways: standard and itemized. This post will briefly explain both.
Standard deductions – Standard deductions refer to the basic forms of income that are not subject to tax. The standard deduction is based on the taxpayer’s filing status (married or single), regardless of whether they are disabled, or are claimed as a dependent on another person’s tax return. Taxpayers generally take a standard deduction because they do not have accurate records of every deductible expense over the year.
Itemized deductions – Like the standard deductions that are allowed, itemized deductions are available to compensate for every deductible expense available under the U.S. Tax Code. Itemized deductions are compiled 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 if you may make too much money.
If you have additional questions about how deductions will apply to your return, an experienced tax attorney can advise you.