Filing a tax return can be a stressful experience for novices. It takes quite a bit of patience and knowledge to grasp all subtleties. For example, not everyone knows the difference between standard and itemized deductions. The process requires a kind of expertise in the local tax law as well to maintain the precarious balance and avoid accidental improper or outlawed steps.
What is a Tax Deduction?
A tax deduction is a sum substracted from the amount of money that you owe to the state. It allows you to deduct some expenses from your revenue, which is normally liable to taxation. In fact, these deductions lessen your taxable income and, consequently, your tax liability.
What is Standard Deduction?
The standard deduction is a fixed sum of money substracted from a taxpayer’s yearly income. This sum is not liable to taxation and it may change over time, because it is inflation-bound. In other words, it is a set sum, which forms over a year, and which citizens deduct from their income at the end of each year. The standard deduction looks like an attractive option for those, who do not have to face any additional taxable expenses.
Itemizing deductions is the right choice for those whose deductible expenses substracted from their gross income form a sum that exceeds the standard deducted sum. Simply put, itemized deductions are great when they result in a smaller amount of money deducted from your general income. There is a tax form (Schedule A), which allows one to list his or her expenses, which are not deductible, exclude them from the general expense list and thus reduce the gross tax load. These expenses include, to name a few:
- Sales and property taxes, as well as other deductible taxes
- Health care and dental expenses
- Job-related education costs
- Charitable donations
- Cost inflicted by damage resulting from theft, natural disasters and force majeure situations
- Mortgage loan points and interests
- Business costs
- Hiring costs
- Tax preparation costs
Also, one must know all expenses that are not deductible according to the IRS, because trying to exclude any of them can result in a serious penalty:
- Commuting expenses
- Rent payments
- Home repair and remodeling expenses
- Adoption costs
- Hobby-related and personal expenses
- Legal fees and tax penalty payments
Also, there are expenses, which can be deducted even by those who choose the standard deduction. However, in any event, these deductions (as well as itemized ones) have limits and guidelines, so it is imperative that you refer to IRS and choose the most optimal option for you before making the final decision.
It is evident that both standard and itemized deductions can work well for taxpayers. However, what is great for some people is not so great for others. Based on the above, the choice of the type of deductions depends on various factors like age, disability status, education, occupation, filing status, etc. However, once again, the main criterion of choice is the size of the sum deducted from your gross tax load. If itemizing results in a larger sum deducted from your tax load, the itemized deduction is the right option for you, because you give away a smaller amount of money.