Reduce your taxes by finding tax deductions.
Tax deductions are a way for taxpayers to reduce their overall taxable income. Tax deductions and tax exemptions work to reduce the amount of your adjustable gross income, thereby reducing taxable income. By lowering your taxable income, you lower the amount of money you must pay to the IRS.
Type
Tax deductions are a way to adjust your taxable income amount when tax time comes. There are two general types of tax deductions that can be filed on a tax return. The first is the standard deduction. Deduction amounts vary according to your assigned filing status. The second is the itemized deduction, which is based on tax-privileged items and expenses incurred within the tax year. There are several eligible expenses that can be listed as deductions; however conditions do apply for each one. Whether you decide to file for a standard deduction or itemize your deductions will depend on which total amount is greater. The standard deduction amount is often more than the itemized deduction amount.
Features
Regardless of whether you file for a standardized deduction or itemization, there is a third deduction group that can help with reducing taxable income. This group is called the "above the line" deductions, simply because they appear at the top of the 1040 and 1040A tax form. These above the line deductions include interest paid on student loans, job relocation costs, contributions made to a health savings account and alimony payments. Anyone with taxable income is eligible to claim these deductions. "Below the line" deductions are deducted from your adjustable gross income, meaning they are subject to limitations of amounts that don't apply to above the line deductions.
Benefits
The obvious benefit of filing for tax deductions is a reduced overall tax debt. Any time you make a major life change, your tax status or deduction opportunities will likely change as well. Getting married, having a child, buying a home, incurring college expenses or starting a business are all events that may give you some added tax advantages. As the tax laws do change from year to year, always do a check to see if there are new deduction possibilities.
Risk Factors
Filing deductions is typically risk-free when you file for a standard deduction; itemized deductions carry risks. Itemizing deductions means that you have an expense log and any and all receipts necessary to back up what's filled out on your tax form. An individual or business's highest probability of being audited occurs when there's a change in your deduction status, or if you earn over $100,000 as an individual or show profits over $10 million as a business. In all three cases, make sure your bookkeeping is in order. Misrepresentation of taxable income is considered tax evasion by the IRS, which can land you in jail.
Significance
While the general purpose for taxation is to finance government expenditures, tax deductions offer a break to those taxpayers whose methods of earnings give back to the economy. Small businesses provide jobs and strengthen the economy. Students are seen as future assets to the economy. Married couples and children add to the stability features of our economy.