When you finally decide it is time to prepare your taxes, the
first question is whether you should itemize your deductions or
take the standard deduction provided by the IRS.
Choices, Choices...
Tax deductions are a very simple part of a theoretically simple
tax reporting system. If you've ever prepared your own taxes,
you know this simply isn't true. Complicated tax forms can be a
nightmare to fill out. Ever helpful, the IRS gives you an option
of just taking a standard deduction instead of itemizing your
deductions. So, what should you do?
The standard deduction is the easiest method because it requires
no calculations or supporting documentation of any sort. You
figure out your adjusted gross income and simply submit the
amount for your classification. The amount differs based on
whether you are filing as single, married, older than 65 or have
kids.
Many people scoff at the mere idea of taking the standard
deduction. As with all tax issues, deciding whether to take the
standard deduction isn't so easy. If you have a fairly simple
financial life and don't have many deductions, the standard
deduction is almost always the best choice. For instance, if you
make $45,000 as an employee of a company, rent a residence and
don't have any major medical bills or losses, the standard
deduction is probably going to save you more money than
itemizing. Unfortunately, you can never be sure until you take a
stab at itemizing your deductions in a rough draft of a tax
return.
Itemizing your deductions is exactly what it sounds like. You
literally go through your records and categorize every possible
deduction. These deductions are then subtracted from your
adjusted gross income to get a final figure from which tax is
determined using the tax tables. Itemizing is the way to go if
you have significant tax deductions or tax credits in your
financial life. For instance, you almost always want to itemize
if you own a home as mortgage interest can be deducted.
Generally, you want to itemize if you own a home, have
significant medical bills, can claim a tax credit or suffered
some type of major loss. Obviously, there are other situations
where itemizing makes sense, but this gives you an idea of the
situation.
If you have a simple financial situation, claiming the standard
deduction may be the answer. If life is a bit more complicated,
itemizing is probably going to save you more on your tax bill.
About the author:
Richard A. Chapo is with
http://www.businesstaxrecovery.com -
recovery of business taxes through tax help and tax relief.
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http://www.businesstaxrecovery.com/articles to read more
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