Bankrate.com, an online financial publisher, advises that the easiest way to reduce your tax bill is to reduce taxable income. The IRS provides two ways to deduct taxable income and increase annual tax returns--standard deduction and itemized deduction. Standard deduction is the primary method of decreasing taxable income as it is based automatically on the individual or corporate filer's filing status. Itemized deduction, on the other hand, is adjusted based on the filer's declared expenses. Allowable goods and services for itemized deductions are outlined by the IRS.
What is the difference between itemized and standard deductions?
Taxpayers choose between filing a standard deduction or an itemized deduction. The IRS advises that you file the one that provides the lowest tax.
Standard deduction amounts can change per year, subject to inflation. In 2009, for example, the IRS shows that the deduction amounts for a single individual is $5,700, while for someone who declares head of household, the deduction amount is $8,350. Aside from your filing status, your standard deduction can also be affected if you are 65 or older or blind and when another taxpayer has claimed an exemption for you.
On the other hand, it is more advisable to prefer itemized deductions if you spend largely on medical expenses, state and local taxes, donations to charity among other deductible expenses as specified by the IRS. If the total amount you spend on those expenses is more than the standard deduction allowable for your status, you are better off filing itemized deductions.
What are allowable itemized deductions?
Allowable itemized deductions are only those expenses that are incurred during the past year, since your previous filing. Apart from those that have already been mentioned are mortgage interests, gifts, casualty and disaster losses and other miscellaneous deductions.
Itemized deduction can also be an option for someone who has limited standard deduction due to an exemption filed for you by another taxpayer. One example is your parent's tax returns.
However, not all expenses can automatically allow deductions. Based on tax laws, there is a certain threshold in spending for each type of allowable itemized deduction. Only those expenses that exceed the threshold are qualified. For instance, the IRS may require that only expenses exceeding 7.5 percent of your adjusted gross income be deducted if you wish to declare your medical care spending. If you didn't spend that much for the whole year, your medical expenses are not considered deductible.
Are itemized deductions required?
Taxpayers who are not eligible to file standard deduction are automatically required to file itemized deductions instead. Required taxpayers include nonresident aliens, dual-status aliens and those who file returns for a period of less than a year which happens due to a change in accounting periods.
Dual-status aliens are those who became a resident alien in the middle of the tax year. Nonresident aliens who are married to a U.S. citizen or a resident alien are also required to file itemized deductions unless they choose to be treated as a U.S. resident.
Married couples who choose to file tax returns separately can only choose between standard deduction and itemized deduction. When one spouse files itemized deduction, the other must file the same.
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