IRS Audit, IRS Audit Help, IRS Audit Process

IRS Deductions – Standard or Itemized?

March 7, 2013 - IRS Audit, IRS Audit Help, IRS Audit Process

Does the fear of paying too much tax drive you to buy more deductions? Yes, I said “BUY” deductions. They cost you money, you know. Did you know that our government has a FREE deduction for most of us? That free deduction is called the STANDARD deduction. I say it’s ” free” because you don’t have to spend a dime to claim this one. The amount of your standard deduction does change from year to year and is based on your filing status. Single, Married Filing Jointly, Married Filing Separately, Head-of-Household status all have a different standard deduction.   Categories of Deductions There are various categories of deductions that are allowable on 1040 tax return form Schedule A, Itemized Deductions. These different categories are 1) Medical and Dental Expenses, 2) Taxes You Paid, 3) Interest You Paid, 4) Gifts to Charity, 5) Casualty and Theft Losses, 6) Job Expenses and Certain Miscellaneous Deductions and 7) Other Miscellaneous Deductions. In deciding whether to take the standard deduction or whether to itemize deductions, I ask my clients if they own their own home. And if that answer is yes, I ask if they have a mortgage on their home. Interest paid on a home mortgage is usually the largest of deductions. If you own your own home, you also pay real estate taxes. If you live in a state that has an income tax, those taxes you paid or had withheld from your paycheck are deductible. Because there are states that do NOT impose an income tax, the government allows us to choose to deduct sales taxes paid instead of income taxes paid. And if you have a car, you may also be able to deduct the license plate registration fee. Unusually large medical expenses can also shift you from taking the standard deduction to itemizing deductions. I tell my clients that this is NOT the big deduction I want them to have. Amounts you pay for medical insurance, doctor and dentist visits, prescriptions and lab fees are the common deductions. There are costs that are deductible and there are costs that are NOT deductible. How do you know which is which? Listen to the recording of my August 10, 2012 radio program for more information on medical expenses. LINK   Charitable Contributions Count Too! If you know you want to itemize, then you will also want to look at the gifts you gave to a qualifying charity during the year. These gifts can be money and they can be what I call “stuff.” Money does not just mean paid by cash. Money means cash, check, credit card. The important key is to get a RECEIPT for your gift. The Internal Revenue Service is paying much closer attention to this deduction because of fraudulent deductions claimed every year. Listen to the recordings of my August 31, 2012 and December 7, 2012 radio programs on contributions for more information. Click Here. There are rules to follow (of course! ) for each of the itemized deductions. Listen to the recording of my March 1st radio program for more detailed information. Click Here. In this recording you will hear why I say these deductions take money OUT of your pocket. Is your expense ordinary and necessary? Is your expense one you decided you needed only because you wanted to lower your tax bill? Did you know that if you are in the 15% tax bracket and you spend $1000 on an “elective” deduction. you might save $150 of tax, but you are still out $1000! If you don’t need this deductible expense, don’t spend the $1000. Pay $150 more in tax and you still have $850 in your pocket! If you have a choice, what is YOUR choice? Always to your lowest legal tax, Nellie T Williams, EA