Income Tax Deduction

A tax deduction represents a reduction against a taxpayer’s Gross Income. In most cases a tax deduction is an actual cash disbursement or expense incurred by a taxpayer; however; there tax deductions such as depreciation and amortization that are not.

Tax tables are characterized by incremental income brackets and ascending percentages. The higher the income, the higher the percentage of the tax to be paid. Therefore; deductions to Gross Income not only reduce the income by the deduction amount, it also contributes to lowering the tax bracket of the total income on which the tax will be computed.

The IRS allows two choices for deductions from Gross Income: The Standard Deduction, and Itemized Deductions.

Standard Deduction vs. Itemized Deductions

Standard Deduction is a pre-set deduction for individual taxpayers. When opting for a Standard Deduction the taxpayer is precluded from itemizing actual expenses.

The Standard Deduction amount is determined by the filing status of the taxpayer, and it is revised by the IRS and increased slightly every year. Taxpayers who opt for a Standard Deduction are eligible for filing Form 1040A; a highly simplified tax return that does not require additional schedules.

If the sum total of actual allowable expenses that qualify as itemized deductions exceeds the Standard Deduction amount it would likely be more beneficial to Itemize deductions.

It is worth noting; however; that some taxpayers would not qualify for the Standard Deduction. Those are: Any tax return covering a period of less than twelve months, non-resident taxpayers or those with dual-status aliens, or those whose spouse is itemizing deductions filing a separate return.

Itemized Deductions

Itemized Deductions, conversely, allow the taxpayer to offset many allowable expenses against the total Gross Income. Those expenses are categorized in Form 1040 and itemized in applicable schedules, depending on the complexity of the deductions of a specific return.

State, local, personal property, and real estate taxes, mortgage interest, qualified mortgage insurance, points, a portion of medical and dental expenses, casualty, disaster, and theft losses, gifts to charity, business use of home, business use of car, business travel expenses, business entertainment expenses, educational expenses, employee business expenses, miscellaneous expenses, and tax preparation fees.

Your itemized deductions may be subject to limitations if your adjusted gross income exceeds the threshold set forth by the IRS each year.

Saving Business Records and Receipts

Taxpayers are required to substantiate the expense deductions with receipts, cancelled checks, or other proof of payment. Undocumented deductions may result in disqualified expenses, and therefore; additional income tax, plus applicable interest and penalties

Getting expert financial help

This brief outline does not cover the complexity of specific returns, or the limitations applicable to certain expenses when electing methods of filings, which could significantly impact the determination of the most beneficial method for filing your return.

It is crucial to consult with a CPA or Certified Tax Preparer for prudent tax advice and assistance with the preparation of your return.