What you need to know about tax deductions
You probably know tax deductions are an important part of your income tax return and that you want as many as possible. But do you understand how deductions actually save you money or how to determine which ones you can claim on your tax return?
“Simply put, deductions lower the amount of your taxable income,” explains Jessi Dolmage, spokesperson for TaxACT, makers of popular tax-preparation software. “The more deductions you have, the less tax you pay.”
Knowing which deductions you qualify for and whether you should itemize is easy with do-it-yourself tax preparation products. Dolmage says: “The program eliminates the guess work. Answer simple questions about deductions and it will tell if you’re better off itemizing or taking the standard deduction. It also checks for errors and offers one-on-one tax help every step of the way.”
You have the choice of claiming the standard deduction or itemizing deductions on your tax return, but you should choose whichever amount is higher.
Nearly two out of three taxpayers claim the standard deduction. Amounts are adjusted for inflation each year, vary by filing status and are higher for those 65 and older or who are legally blind. For 2012 federal tax returns due April 15, 2013, standard deduction amounts are:
* $5,950 for single or married filing separately
* $11,900 for married filing jointly and qualifying widows(ers)
* $8,700 for head of household
If you itemize, your deductions are listed separately on your tax return. Itemized deductions are reported on Schedule A and can only be filed with long Form 1040. On the other hand, taxpayers claiming the standard deduction can file Form 1040, 1040A or 1040EZ.
Itemized deductions may include mortgage interest, state and local taxes, charitable gifts, unreimbursed employee expenses, uninsured casualty or theft losses, and miscellaneous deductions. However, your expenses must meet certain requirements to qualify as itemized deductions. For instance, certain miscellaneous deductions must exceed 2 percent of your adjusted gross income, and unreimbursed medical and dental costs must exceed 7.5 percent of your adjusted gross income.
If your tax return filing status is married filing separately, both spouses must claim the same deduction type. If one spouse itemizes deductions, the other must also itemize, and vice versa.
All taxpayers are eligible for certain deductions, regardless of whether they itemize. Examples include traditional IRA contributions, student loan interest, alimony payments, moving expenses and a portion of your self-employment tax (if applicable). Deductions like these are often described as “above-the-line” because they are deducted from gross income. Itemized and standard deductions are subtracted from adjusted gross income.
Learn more about deductions in IRS Publication 501 at www.irs.gov. For step-by-step guidance through deductions, tax forms and free tax help, visit www.taxact.com. TaxACT Free Federal Edition has everything you need to maximize your deductions and file your federal tax return free.