In the United States, several tax deductions can reduce a taxpayer's taxable income, which, in turn, lowers their taxes. Congress created these deductions as part of an effort to provide citizens with some relief from taxes and boost the economy by giving people back more of their own money.
What Is A Standard Tax Deduction?
A standard tax deduction is an amount that the Internal Revenue Service (IRS) has deemed to be "standard" for income taxes. What this means that the IRS expects citizens to take this deduction when filing their federal taxes.Also, the federal government sets a flat-rate standard deduction amount for all taxpayers who do not itemize their deductions. It means they do not list specific items that they are deducting from their taxes.
The standard deduction amount varies depending on the taxpayer's filing status (e.g., single or married filing jointly) and depends on inflation in each tax year. For 2021, married individuals filing separately and single taxpayers can claim $12,400.
For couples filing jointly and qualified widows or widowers, the standard deduction is $24,800. The heads of a household, meanwhile, can claim $18,650.
What Are Itemized Deductions?
Itemized deductions are expenses or situations that are deductible from taxable income. These work in much the same way as standard tax deductions, but they're "itemized" separately on a person's 1040 form instead of automatically taking the standardized deduction.Some of the popular itemized deductions include:
- Medical expenses
- Tax preparation fees
- Mortgage interest payments on a loan
- Gifts to certain organizations, such as the Red Cross or United Way Charitable donations
- Interest on student loans
Americans can claim a lot of tax deductions, some of which are unfamiliar. For this reason, it is helpful to work with a tax filer or use a tax program that contains all the possible deductions. Here's a list of software for professional taxpayers.
Standard vs. Itemized Deductions: When To Do Either
One question that taxpayers often ask is whether they should itemize their deductions or take the standardized deduction (you cannot do both). The answer to this question can be complicated because it involves looking at a person's circumstances.However, according to the IRS, there are some general guidelines for deciding between taking an itemized tax deduction and taking the standard deduction.
When you should take an itemized deduction:
- You make large purchases or investments during the year (such as buying a house or a car).
- You have many deductions that would add up to a larger sum than the standard tax deduction.
- You do not qualify for a "special tax credit."
Note: A tax credit is a deduction subtracted from a person's tax bill after calculating how much taxes they owe. A special tax credit is designed to help certain taxpayers, such as those taking care of elderly parents or disabled children. Family and medical leave pay is another example of a special tax credit. A credit is different from a tax rebate. A rebate is a refund that you get back from the government after filing your taxes, regardless of whether you owe any money to Uncle Sam.
When you should take a standardized tax deduction:
- Your deductions do not add up to more than the amount of the standard tax deduction.
- You want to have a simpler tax form, which you can accomplish by taking the standardized deduction.
- You are single and claim no dependents or are married with two dependents claiming less than $1,500 in child tax credits.
- You are married with two dependents and claim less than $3,000 in dependent tax credits.
Keeping Track Of Your Deductions: A Checklist For Your Taxes
No matter which type of deduction you choose (standard or itemized), the IRS recommends keeping thorough records throughout the year. The IRS might have questions about the information you provided in the returns.
Whether you choose to take the standard tax deduction or itemize your deductions, this is a checklist of records and documents that you should hold on to for several years:
- All receipts related to expenses that could be deductible (such as medical costs or charitable donations). Keep all bank and credit card statements related to purchases that could qualify for deductions.
- Receipts for purchasing items you plan to give away as gifts, such as home decorations or appliances. Receive records for any mileage driven for work, volunteer, medical, or charitable reasons.
- Any documents that support your income numbers (such as W-2 forms). Copies of your 2020 tax return, including any forms or documents that support your income numbers.
What kind of tax deduction should you claim? There's no wrong answer to this question: it all depends on your financial situation. If you think you'll have more expenses than the standard deduction, it's best to take an itemized deduction if you qualify--sooner rather than later so that your money can start working for you.
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