Saving money is never a bad idea, especially during tax season. Understanding your tax deduction options — standard or itemized? — is a vital part of your tax preparation efforts. Here’s what you need to know.
Jacob Pippin is an experienced writer based in Orlando, Florida. He writes about a wide array of topics, from technology to marketing.
Tax season 2022 ends April 18, which means you get an extra weekend to file your 2021 taxes. But even in the early days of tax season, do you find yourself having anxious thoughts about having everything you need to file by Tax Day? Like, do you have all the paperwork? What form do you need again? Deductions and credits — huh?
Maybe you’ve decided to go with a tax preparation service or a professional tax preparer to help you sort it all out. Or maybe you have decided to go at it alone with tax software or some other online tax tool. Either way, you have taken the first step toward getting your taxes done https://paydayloanadvance.net/payday-loans-ca/. But how can you save more money by shaving some dollars off that tax bill? Two words: Tax deductions.
What are tax deductions?
Maybe you have heard the phrases before: “You can write those things off on your taxes” or “those expenses are deductible.” If you have spent any time researching tax filing you have certainly run across the term, tax deductions. This term can change the amount of taxes you owe and help you pay less on Tax Day.
Tax deductions have the ability to lower an individual’s or business’s tax liability by reducing their taxable income. Taxable income is the amount of gross income the government deems subject to taxes — both earned and unearned. In basic math terms: Subtracting tax deductions from taxable income lowers that taxable income and in turn lowers the taxes owed. Simple enough, right?
Standard deductions vs. Itemized deductions
Now that we better understand tax deductions let’s look at the two types: Standard deductions and itemized deductions. It is important to note that when you are filing your tax return you have to choose between these two tax deductions. You cannot choose both. Let’s look at each briefly.
Some say this is the easiest option when claiming deductions. It also involves the least amount of work. The standard deduction is automatically set based on how you file your taxes (married filing jointly, married, or single) and age. Depending on the type you choose to file, the amount of taxes is automatically reduced. For example, here are the standard deductions for 2020 taxes to be filed in 2021, per the IRS:
- $12,550 for single taxpayers
- $12,550 for married taxpayers filing separately
- $18,800 for heads of households
- $25,100 for married taxpayers filing jointly
- $25,100 for qualifying widows or widowers ($26,450, ages 65 and older)
The standard deductions are fixed, so there’s no need to pull out the receipts. However, if you have the time, significant expenses, and enjoy crunching numbers then the itemized deduction might be for you. Itemizing deductions is much more labor-intensive because you have to claim expenses one by one. In addition, it requires an additional form (Schedule A form) to be filed along with your tax return. You have to be able to back up the claims you are making on your itemized deductions.
Itemized deductions are expenses that are subtracted from adjusted gross income, having the same goal as the standard deduction in reducing taxable income and lowering the amount of taxes owed. The amount depends largely on the tax bracket the tax filer falls into.