Deductions translate as more money in your pocket and less for the Tax Man (stick it to the Man!) But how does it all work exactly?
An FKD Feature exclusive

Are you are trying to figure out what you can deduct from your taxes this year and what you, sadly, cannot? Well, join the club. That’s exactly what we’re all doing. You have five cats? Sorry, no deduction there. You bought every Shrek movie on DVD this year? No deduction there either unfortunately. Time to figure out just how deductions work so you can use them to your advantage to pay fewer taxes.

 

What are deductions all about?

 

Under federal tax law, poor, tax-paying fools like all of us get the chance to reduce the amount of income that will be considered for tax purposes, aka “taxable income.” We do this through deductions. By deducting certain expenses from our income, we reduce the amount of income that is subject to federal income tax. Sounds easy, but before you get too deduction-happy, it is not always simple to know what you can deduct and what you cannot. The feds run a tight ship, and they are very specific about what can qualify as a deduction, how much can be taken and who can deduct what.

 

First, calculate your Adjusted Gross Income (AGI)

 

Deductions made from your gross income (your total income from all sources) results in your AGI. The less “income” for tax purposes, the fewer taxes you have to pay. Some deductions are “above-the-line” which gives you your AGI and others are “below-the-line” which gives you your Taxable Income. And yes, if you look at your tax form, you will see the actual lines. What kind of things does the IRS allow you to deduct in order to arrive at your AGI? Certain business expenses, like the cost of moving to take a new job, interest paid on your student loans, or the cost of health insurance if you are self-employed are a few. Charitable contributions, interest on your mortgage, and taxes previously paid to state and local government are below-the-line-deductions. There are other deductions as well, but we will cover those in other articles. The basic idea is that you subtract your total above-the-line deductions from your gross income to calculate your AGI. Once you have calculated your AGI, and before you get to the below-the-line deductions, you have another decision to make: should you “itemize” your deductions or take the “standard deduction?”

 

Standard or Itemized Deduction: How to choose?

 

The Standard Deduction is an amount of below-the-line deductions the IRS allows you to take without any figuring or proof. It is a “no questions asked” sort of deal; it may not be the exact amount you could deduct, and in fact it might be more, but it saves you the hassle of keeping all those receipts and calculating all those deductions if you choose to itemize. If you take the standard deduction, which is a flat dollar amount the IRS allows you to deduct, it is certainly the easier route to take. The more important question, though, is “Which method will save me more money?”

The exact amount of the Standard Deduction depends on your filing status (Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Widow(er)). You can find the breakdown for 2017 in the Tax Year 2017 Standard Deduction Table. To give you an example, the standard deduction for the Single Filing Status is $6,350, and for the status of Married Filing Jointly, it is $12,700.

Obviously, you would take the Standard Deduction and forgo the burden of itemizing unless the total of your itemized deductions is more than the Standard Deduction. If you are lucky enough to own your home but unlucky enough to have a mortgage, you might want to itemize because mortgage interest and property taxes are deductible and might, when tallied with other qualifying payments, exceed the Standard Deduction. There are plenty of deductions, but remember, if you choose to itemize, it means you need to keep meticulous records and stay organized throughout the year. You will also have to tackle more complicated paperwork like the IRS Form 1040 (as opposed to the “Form 1040 EZ” which as the name implies, is easier to fill out) and Schedule A.

 

Takeaway

 

Ok. That was intense. But the real point here is that if you don’t have too many unique and special circumstances, then chances are that itemizing your deductions is needlessly complicated and probably won’t work out to your advantage. On the other hand, the Standard Deduction does not account for all possible deductions that you might have depending on your life situation. The Standard Deduction is much easier, and you are guaranteed a certain amount no matter what. The choice is yours, and you can always contact a professional: Someone whose entire job it is to understand, navigate and manipulate the tax-deduction world for your benefit.

 

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Posted 04.14.2018 - 10:00 am EDT