Tax season in the US coincides with spring and is a time of year spring takes on the task of awakening nature from its long slumber. For many people tax time is also a period of awakening.
After the required forms are completed taxpayers are either elated to find they’ll be receiving a huge refund or shocked at the dollar amount owed which must be sent into the Internal Revenue Service (IRS). If the latter happens, you might feel as if you want to head back into a deep winter slumber.
You can avoid some of the tax blues by correctly assessing how to choose your deductions before you file. The IRS provides two methods to file your annual tax return, taxpayers can opt to take a standard deduction or itemize.
It is essential to understand the difference between itemizing and taking the standard deduction because choosing the wrong avenue could cost you. When you file your annual tax return you want to ensure your tax return accurately reflect what you’ve already paid vs. what you should have paid.
In order to maximize your return or minimize your debt up to the fullest extent allowed by law, you’ll want to determine whichever deduction is larger. In order to establish this, collect your W-2s, 1099s, receipts and other documentation, and get out the calculator or install tax software to help you do some number crunching. Your goal is to find the number which gives you the lowest taxable income amount.
You can claim a government pre-determined dollar amount as a standard deduction for yourself, and if you are married and filing jointly, your spouse. Additionally there are conditions where the amount you can claim as a standard deduction may vary.
For instance if you are above the age of 65 or are blind, your standard deduction will be higher. Each year the standard deduction amount is established by the IRS, so it is important to note it may have changed from the previous year.
How many dependents you have will also factor into the standard deduction equation. If you have children there is an allotted amount you can deduct per child if you are the parent deemed eligible to claim children (check eligibility stipulations at the IRS website). There are also some instances where you can claim a dependent who is not your child. Consult with the IRS laws to determine if you are eligible to claim additional dependents.
Add up these totals and make a note of them to help determine whether or not the standard deduction will be more beneficial to you.
It may be a better idea to consider itemizing your return if you own and paid taxes on your property, are paying a mortgage, made significant charitable donations or paid uninsured medical/dental bills during the tax year. Other situations which may apply are large amounts of business related expenses you were not reimbursed for or if you suffered uninsured theft or loss. Calculate these factors to determine how much your eligible itemized deductions amount to.
*Note when filing U.S. taxes, there are times you will be required to itemize your return
a) If you are filing separately from your spouse and they’ve itemized b) If you are not a U.S. resident or possess dual citizen status c) If you’ve changed your annual accounting year and the year does not cover a full tax year, you must itemize
How to Decide
Take a look at both totals, if the standardized amount exceeds the total of your itemizations, then you’d be better off filing your taxes using a standard deduction. Consequently if your itemizations total more, it is to your benefit to itemize expenses on your tax return.
Today technology offers a simple solution if you don’t want to consult and pay fees to a tax expert. Many good tax software programs are on the market and will easily walk you through the above steps. All you’ll need are your receipts and any pertinent financial records to help you determine which way optimizes filing your annual income tax return.