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Make Tax Deductions Work for You
What are Deductions?
Tax deductions are used to lower your gross income, thus reducing your overall tax liability. The more that can be applied, the less taxes you'll owe. Some can reduce their income to a point where they will owe no taxes at all.
It may seem like it's a scam that's guaranteed to make the IRS audit an individual. And certainly improper use will send up a flag. But if every deduction can be documented, there's nothing to worry about. The flip side of all of this is that not taking a deduction won't trigger anything, but the IRS isn't going to pony up and tell you what you missed. Getting anything back requires an amended return. So avoid losing out now by understanding how to use a deduction.
Every tax payer gets to take advantage of the standardized deductions. It's an amount that changes every year, and is dependent on the status of the filer. A single filer gets to take $5700 off of their taxes, plus an extra $300 if they've earned over $650 in the year 2010. This comes to a total of $6000 in a personal deduction. Married filing jointly gets a standard deduction of $11,400 and the same $300 for a total of $11,700.
The deduction is different from the personal exemption, which is $3,650. However, these two will still get totaled up and used to reduce the overall tax liability. Everyone who lives in the household, providers and dependents, get a personal exemption to help reduce the total taxable amount.
Itemized deductions differ in that they can total to a larger amount than the standardized deduction, thus reducing the taxable amount even more. Here, the standardized deduction is still available, but at a lower amount.
Itemizing Deductions with Schedule A
There are a plethora of items that can be used as a legitimate deduction. But for those who don't pay a mortgage or have a lot of job expenses don't need to use schedule A. The standardized deduction will be far superior in terms reducing the taxable amount.
Let's use mortgage interest as an example for a deduction. The bank will issue the homeowner a form 1098 with the amount of interest paid for the year. It shows that $8,000 in interest was paid on the mortgage. Now, if someone is single, it makes perfect sense to itemize as it raises the deduction from $6000 to $8000. Combine this with the exemption of $3650 and it reduces the overall tax liability to $11,650, the same as if the single person were married.
There are other deductions available, such as medical and dental bills. State and local income taxes are also deductible. This is why it's important to not overlook itemized deductions as they can provide great benefit to the taxpayer.
When In Doubt, Seek Help
If there's still uncertainty about using deductions, look for a CPA or a tax professional for help. Someone who says they will stand behind every deduction and credit they find in an audit is going to be the best bet. They're stating that they're educated and know what they're doing. And if going to an individual doesn't feel like a comfortable fit, try the major tax preparation chains.
True, there are fees at a major tax chain, but there will be fees with an individual preparer as well. The advantage to going through the chain is that the employees are trained to rigorous standards. Companies don't want their employees work coming back to bite them on the rear end. These places have built in guarantees for the client's protection.
Don't Be Afraid to Use What's Legally Rightful
Deductions are there to help the taxpayer. It is not the intent of the IRS to trip up a taxpayer and catch them red handed. Deductions are legal, and the taxpayer has a right to use them if they apply. Take advantage of them in order to keep a little more money in the pocket every year.