Everything You Need to Know About Tax Deductions While Filing Your Returns
Getting your tax deductions right while filing your tax returns is the best way to increase your tax refund and also pay the tax you are entitled to and save your income. Both the federal and state government has a list of tax deductions that American citizens can employ to reduce their taxable income. When done right, one tax deduction can fetch better returns than the other, provided you qualify for the slots that you are selecting. Know everything about tax deductions here and evaluate your eligibility. Then, make sure that you do not miss out on any parameter that can help you to pay fewer taxes and bring home more income.
Tax deductions – what are they?
The entire income that you earn from your job or self-employment is not taxable. The federal and state government exempts a few expenses from being included in the taxable income to encourage the citizens to spend on those items or make the savings that help to better the quality of life or exempt them from paying taxes on expenditures that are out of one’s control. These are called tax deductions and they lie under three broad categories – standard, itemized, and above-the-line deductions.
Let’s start with the third category first as these are deducted from your net income to come at your adjusted gross income or AGI. Examples include alimony, health savings account contributions, IRA contributions, self-employment deductions, educator expenses, student loan interest, and more. The maximum limit for those varies depending on the deduction like up to $250 for educator expense and $3,550 for HAS contributions. Recently, an update has been made to alimony deductions where divorces finalized before December 31, 2018, can only file for this specific tax deduction.
Standard or itemized deductions
These are deducted from your AGI to arrive at the taxable income, not from your net income. And you can either choose to deduct standard deductions or itemized deductions, not both.
Standard tax deductions are calculated based on your age, marital status, spouse’s age, and physical disability. As per the most recent bracket of 2020, single tax return filers are eligible for a $12,400 standard tax deduction while that figure increases to $24,800 if the tax return filer is married and filing along with the spouse. If the citizen is more than 65 years of age and blind, the IRS adds a further tax deduction of $1,650 for single tax filers and $1,300 for joint filers on top of the standard deductions.
Itemized tax deductions include the categories of medical expenses, charitable contributions, home interests, and state and local taxes that are already paid. The federal government does not tax that portion of your salary that you are giving away for charity. Similarly, your medical expenses are also exempted if you can produce receipts that prove the diagnosis and treatment. Home mortgage interest on the first $350,000 is again deducted from AGI to come at your taxable income. The same applies to state or local taxes.
Listing the deductions right
You need to keep three things in mind here. One, you have to be meticulous about which tax deduction you should go for – standard or itemized. For some, itemized is more profitable than standard if they make a considerable amount of charities or medical expenses are recurring. Others with straight forward income and expenses, standard deductions make more sense.
Two, above-the-line deductions can become confusing. For instance, you might not be able to say for sure if your alimony will come under this tax deduction or not. Plus, charitable donations under $300 have now come under above-the-line deductions which means you can include it in your tax return even when you go for standard deductions.
Lastly, make sure you have the paper trail of every transaction that you have made with your net income. This includes receipts, the name and registration number of the organization to whom you have donated, gifts received in return, and so on. The IRS will want to look at everything while evaluating your tax deductions that you have claimed on your return.
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