How To Pay Less Tax Using Deductions
With debt rising, everyone wants to reduce their expenses and taxes. So, ensuring that you make the most of your tax deductions means you won’t pay more than you should. But what is a tax deduction?
A tax deduction is an amount that you are allowed to subtract from your taxable income. When you reduce your taxable income you reduce the tax you have to pay. If your taxable income is $50,000 and you claim $10,000 in tax deductions, you’ll only pay tax on $40,000. That will save you a considerable sum. Keep reading to find out more about tax deductions.
Standard deduction vs itemized deductions
There are two ways you can file your tax return. You can itemize deductions or you can take a standard deduction.
The standard deduction is a fixed amount of deductions based on your tax filing status. It generally changes from year to year. Itemizing simply means that you list each deduction on a separate Schedule A form which is submitted with your tax return.
Itemized deductions include:
1. Interest you paid for a home mortgage, including points and mortgage insurance premiums
2. Medical expenses
3. Charitable gifts to qualified organizations
4. Dental expenses
5. Job expenses not reimbursed by your employer
6. Tax preparation fees
7. Safe deposit box fees
You choose the option which is most beneficial. For example, if you’re a single taxpayer, your standard deduction in 2011 is $5,800. If you have more than $5,800 in itemized deductions, you should use this option as you’ll save more money.
Taking the standard deduction is easy because you don’t have to gather any records or do any calculations. However, this won’t help you reduce your tax bill. You should always work out both ways and pick the method that lowers your taxable income the most.
You should remember that some of the deductions are limited based on your income. For example, you can only deduct the amount of your medical and dental expenses that exceed 7.5% of your adjusted gross income. You’ll find the rules that apply in each case on your Schedule A form.
Tax Deductions You Can Take Without Itemizing
There are also some tax deductions you can take when you claim the standard deduction. They’re listed on Form 1040 in the section labeled Adjusted Gross Income. They include the following:
Moving expenses if you’re moving over 50 miles for a new job
IRA contributions up to a maximum level
Health Savings Account contributions up to a maximum level when you have a high-deductible health plan
Alimony you paid
Student loan interest up to a certain level
Tuition fees paid to a qualified institution up to a certain level
Some self employed expenses such as health insurance payments
This guide should help you know if you can save money using either the standard deduction or itemized deductions. Remember that the key is to work out your deductions using both methods and apply the one that reduces your tax liability the most.