Winter is officially here and Spring is just around the corner, so that leaves our fifth season somewhere in between. That’s right, Tax Return Season is here. As taxpayers anxiously await their large tax return refund they have high hopes of gaining instead of paying Uncle Sam this year.
April 15 is the official deadline on those who have yet to file their taxes, and until then, taxpayers have a major decision to make before undergoing the tax return process.
Tax filers have the option to accept the pre-established federal standard deduction on their return or choose to itemize each allowable expense that can be deducted from the 2013 year. A tax deduction reduces the taxable income you’re liable for and each option has its benefits.
What Is a Standard Deduction?
A standard deduction is a blanket option offered to taxpayers, which might give qualified filers the advantage of lowering the amount of their taxable income.
Internal Revenue Service standard deductions are as follows for a majority of taxpayers:
|Single or married filing separately||$6,100|
|Married filing jointly or qualifying widow with dependent child||$12,200|
|Head of household||$8,950|
This general deduction makes the already-grueling tax preparation process much simpler and takes less time for those who are too busy to pull up year-old receipts and paperwork. While the standard deduction may be a less stressful approach to completing your tax return, it isn’t a viable option for everybody and might not be the most rewarding option for your bank account.
What Is an Itemized Tax Deduction?
Unlike the standard deduction, itemized deductions result in different taxable income amounts from person to person. Those who qualify for the standard deduction have the leeway to choose the itemized route; however, individuals who aren’t eligible for the standard deduction can only itemize their tax deductions.
Filers who fall into the following categories cannot take the standard deduction:
- You are married, but filing separately and your spouse itemizes deduction.
- Your tax period is for fewer than 12 months due to a shift in your accounting methods.
- You were considered a nonresident alien or dual-citizen during 2013.
Only certain expenses are allowed to be itemized for tax deduction purposes, which include:
- Expenses for medical care.
- Interest and taxes paid on your home.
- Business expenses that have not been reimbursed.
- Uninsured theft casualties.
- Charitable donations.
A combined itemized deduction amount that is larger than the standard deduction amount can save money for those willing to put in the time and effort to crunch the numbers.
Is Itemizing Your Tax Deduction Right for You?
If you are among the group of filers who have a choice when it comes to how to claim your tax deduction — and really, even if you don’t — you’ll have to brush up on your arithmetic to determine if itemizing is financially beneficial.
Taxpayers whose adjusted gross income exceeds certain thresholds might have a limit imposed on the amount they can deduct from their taxable income. You’re subject to this itemization limit if:
- You earned more than $300,000 and are married filing jointly or a widower.
- Earned more than $275,000 as the head of household or more than $250,000 if single.
- You’re married, filing separately, and earned more than $150,000 last year.
Individuals who exceed AGI limitations are faced with deduction limits for expenses such as charitable giving, paid taxes and interest, as well as business-related expenses. However, deductions for qualified medical and dental costs, losses to personal and income-generating properties, investment interest and gambling losses aren’t limited.
The Government Accountability Office says as many as 2.2 million tax filers overpay on their taxes by as much as $610 each year because they choose the standard deduction over the itemized option.
So take the time to gather your calculator and tax paperwork and compare how much money an itemized deduction can save you compared to the standard deduction. You’ll be able to brave the tax season and come out smarter and more financially stable on the other side.
Original article courtesy of Jennifer Calonia at GoBankingRates.com.