Selecting between Standard & Itemized Deductions
Filing a tax return annually is an important part of your business activity. But as you prepare your tax return, there is one question that may pop up a lot. And that is whether you should itemize your deductions or prefer to go with the standard deduction that the IRS generally provides to its tax payers.
Theoretically tax deductions are considered a very simple component of the tax reporting system. But ask someone who prepares his tax return himself and you will learn it’s not as simple as it is usually considered to be. To add to your worries is the lengthy and complicated tax forms. Keeping those complexities in mind it is often wise to just rely on the standard deduction given by the IRS. Or you could decide to go for itemized deductions. So, it’s important to find which deduction system will work best for you.
The standard deduction does not require any calculations or supporting documents and thus is the easiest way to go. You only need to calculate your annual gross income and then submit the calculated amount for your classification. The amount of taxable income differs based on your filing status. The eligible filing status’ are single, married (filing jointly or separately) or Head of Household. To qualify for head of household you have to be single and the primary or sole source of income for a household that includes qualifying dependants.
People may ridicule your decision to take the standard deduction. The fact is that with some types of tax issues, the standard deduction may not be the most suitable option. For people who have fairly simple financial transactions with a limited number of deductions, the standard deduction is usually the perfect choice. For example, if you are an employee of a company with an income of $50,000, you rent your home and don’t have any major medical bills; you are definitely a person more suited for the standard deduction. And whether an itemized deduction will work for you or not may not be clear to you unless you attempt to itemize your deductions in a rough draft of your tax return.
Itemizing your deductions means categorization of every possible deduction. Itemizing of deductions always works best if your financial transactions involve a significant number and volume of tax deductions. For example, if you own a home which entitles you to deduct your mortgage interest and your medical bills are stupendous, you would certainly be better off if you itemize your deductions. In reality, there is no ideal condition or situation where itemizing your deductions is the only option. The example quoted above aims at giving you an idea of the situation where you can itemize your deduction.
In nutshell, if your financial transactions are simple, the standard deduction may be your best choice while in the case of a complicated financial life, itemizing your deductions may optimize your tax return.
So, when your deductions are figured out, the next thing is to find out the taxable income. In order to get your net taxable income, you will have to subtract these deductions from your adjusted gross income. The tax is then determined using the tax tables.