Standard vs Itemized Deductions

How carefully and thoroughly do you consider your options when making deductions on your yearly tax return? Many taxpayers simply use the 1040A or 1040EZ forms, fill them out as quickly as they can, and let it go at that. Yet it's quite possible that most of these people are doing themselves (and their bank accounts) a disservice.

Standard Deductions

The standard deduction is a fixed amount that's automatically deductible from your adjusted gross income (or AGI). The size of the deduction depends upon your tax filing status. The largest deductions are given to individuals who file with a status of "Married Filing Jointly." Those with "Qualified Widow(er)" and "Head of Household" filing statuses receive lesser amounts, and those whose status is "Single" or "Married Filing Separately" get the smallest standard deductions. The amounts are subject to change due to cost-of-living fluctuations and have typically been raised yearly by the IRS.

Itemized Deductions

However, that's not the end of the story. You have the option of making itemized deductions. Many people are under the mistaken impression that you have to be rich in order to itemize. Others don't understand the process and give up on it, imagining that it is too complicated. However, itemization is actually not very difficult and can be done by almost anyone who files taxes. It simply involves adding up all of your expenses that are considered deductible according to IRS rules. If the total of these itemized deductibles exceeds the amount that you qualify for under the standard deduction, then you should use Form 1040 along with Schedule A to take the larger deduction. Increasing deductions works in your favor to lower your taxable income. Any amount that can legally be shaved off of your income reduces the amount that's left to be taxed by the government.

For example, let's say that you run a business out of your home. You work in a room that's set up as an office. The equipment in this room is used solely for business purposes, and you also take conference calls and meet with clients there. According to the IRS, the costs associated with or generated by this room are tax-deductible as home office expenses. Not only can you deduct the room's equipment, supplies and furniture, but you can also take off a commensurate portion of your mortgage or rent, electric and utility bills, and telephone expenses.

Of course, there are many more deductions available with a home office, but you certainly don't have to run a business out of your house to take advantage of itemizing. Medical expenses, charitable contributions and property taxes are just a few of the expenses that you might be able to deduct from your income. There is a wealth of deductions for which you could possibly qualify. It's worth a bit of extra time to check them out on your own or to discuss them with a tax professional.

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