Itemized Deduction: You should itemize your tax deductions if your total amount of the itemized deductions is higher than the standard deduction amount. This can help you save money on the taxable income.
For instance, if your itemized deduction amount is higher than the standard deduction amount by $10000 and have an approximate tax rate of 30%, then you will save $10000 x 0.30 which is $3000.
This is just directional information and the rates may vary depending on the individual and the inflation that year. If you net worth is more, and have expenses that are allowable in the itemized deductions, then you can save a much larger amount.
The allowable itemized deductions and expenses include:
1) Medical expenses – if that exceeds 10 percent of your gross income
2) State and local taxes paid
3) Mortgage interest expense
4) Investment interest
5) Charitable contribution
6) Casualty and theft losses
7) Miscellaneous deductions
Standard Deduction: However, if the total amount of the itemized deductions is lower than the standard deduction amount you can choose to take up the standard deduction. If you do not have all the receipts of the expenses that fall under the itemized deductions, you can still lower your taxes with the standard deduction. This is convenient and most of the returns filed are standard deduction.
This is a fixed amount that reduces your taxable income. In 2012, the standard deductions were:
1) $5,950 for single filers or married couples that file separately
2) $8,700 for head of household filers
3) $11,900 for married couples filing together
The standard deduction may be limited, if you are a dependent on someone else’s tax return. Married couples filing separately should choose the standard deduction and if one of them itemizes, then the other will not be able to claim the standard deduction.
However if you are not married but are the co-owner of a house, then one of you can choose the itemized deduction that covers the mortgage, charity donation and other taxes. The other co-owner can file a standard deduction. This method could save much more.
There could be higher savings (under standard deductions) if the claimant is above 65 years of age, claiming a disaster loss or if the person is blind. If a claimant is blind as well as older than 65, there will be additional deductions apart from the standard one.
The choice of deduction is not for a life time. If you choose standard this year, you can itemize the next time. It makes sense for couples to plan the deductions together to save as much as possible.
If one of them is itemizing, the partner should do so as well. The standard deduction rates might have increased, depending on the year’s inflation. This means that you will not have to itemize and maintain all those receipts, and choose the more convenient option of standard deduction.
However, it still depends on your individual expense style. Note that you will not be able to itemize every dollar that you spend.
The Benefits of Filing Your Taxes with Turbo Tax
When you use TurboTax 2014 we help you get your biggest refund by asking you simple questions, showing you which deductions you qualify for and recommending the best choices for calculating your tax refund.
You can even try standard deduction or the itemized deduction before you file, to see which gets you the best results.You can even free tax refund calculator to see how much money you can expect to get back.