Cutting taxes is something every American would like to do. But before it is time to start filing your taxes you may want to start thinking about what kind of deductions you want to make.
There are two common deduction methods. One is called the standard deduction the other is called the itemized deduction.
The standard deduction is the most popular and the easiest deduction to take. You don’t have to keep track of receipts and you usually will have a larger deduction with this method. Luckily, each year the deduction amount usually rises, because it is adjusted annually according to the yearly rate of inflation. When we file taxes for 2005 the standard deduction will be $5,000 if single, $7,200 if filing as head of household and $10,000 if filing jointly as a married couple. The amount of this deduction can be found on either of the three forms used in filing:, the 1040, 1040A or the 1040EZ.
But other people may find that it is worthwhile to itemize. These people firstly have to be organized because many receipts need to be kept. The also have to file a schedule A along with the long 1040 form.
The biggest reason people chose to itemize is the fact that they had to pay out a lot of money in medical expenses. First, if you are going to claim medical expenses you need to figure out what your adjusted gross income is the for the year. Your adjusted gross income is all income you generated that year, including wages, interests on checking, savings, Cd’s, etc, plus alimony you may have received. Then you need to check to see if your total medical expenses exceed 7.5 percent of that income. If it doesn’t exceed that amount, you can not take the deduction.
When looking at medical expenses you can claim such things as the premiums you paid yearly for your health insurance coverage, all out of pocket medical expenses, (which is the amount you paid after the insurance paid their share), any ambulance payments, such overlooked items that your insurance wouldn’t pay such as extra eye glasses or contacts, false teeth, hearing aids and even surgery for vision repair. To find out the entire list of deductions you may claim under medical expenses check out the IRS publication 502.
The second main reason people chose to itemize is the education deduction, especially if you have children in college. You can use the total tuition cost and fees, such as the price of books used in the classroom as a deduction. You can also you this as a business deduction when the education was work related.
There is a few more deductions one could use if you decide to itemize.
One is the state and local tax deduction when itemizing. But to do this you must first see which is the greater what the IRS uses as the average sales tax or what you are paying where you live. Of course, you only want to use this deduction if your local and state taxes are the highest.
The other is the disaster or theft deduction. This deduction is really going to profit people who were victims of any of the Hurricanes that had hit this year. It covers any damage done to one’s home or property because of floods, ice storms, earthquakes and any other natural disasters and or theft. To take this deduction the lost must be at least $100 and the total loss had to be at least 10 percent of your adjusted income for that year before you can claim. When calculating loss you calculate what you had to pay out of pocket after any and all insurances claims were met.
Then there is the miscellaneous deductions which include:
Job search expense deductions which includes cost of resumes, postage, phone calls in search of a job and all training and counseling fees.
Investment expense deduction which includes fees from brokerages, safety deposits fees, and even subscriptions to investment publications.
Gambling loss deduction includes all loses you had before you won. An example of this would be all the lottery tickets that you didn’t hit. But to claim this loss you must first hit the big jackpot.
Tax return preparation deduction is the price it cost you to have your taxes completed for you.
As you can see using the itemizing deduction takes a lot of research and thought. You must have written proof of all the deductions you make and you must first make sure you are entitled to said deduction. Every year the rules change, so you must be aware of the ever change laws.
The simple thing to do is do the math. If you can get more deductions by using the itemizing deduction, go for it. If you aren’t making more by doing the itemizing and by doing all the work, you shouldn’t mess with it. It also costs more to have your taxes prepared if you chose this method.
One more thought. If you are married and filing separately take extra time in making your decision. Because as a married couple if one is using the itemizing deduction the other spouse has to use it, too, even if it means both spouses won’t be saving.
Filing taxes is not easy. That is why most people pay other people to do it for them.