When you file your taxes there are two deduction options that you are presented with. It is important that you know these options so that you can take the deduction that is perfect for your particular situation. When it comes to deductions, there are a lot of them and many individuals have a tendency to miss them.
First things to know
The first thing to know is that the dollar amount in deductions you can take will depend on your filing status. For instance, if you are married and filing jointly, a widow, or head of household, you are going to get the maximum deductions. Those single or married filing separately will get less in deductions. The amount of the deductions you receive are determined by the IRS and the only way it will change is if the IRS decides to change the rules or some sort of legislation is put in place by the government.
The standard deduction is based upon the above criteria and the amount of income you brought in during the tax year and how much of that income is taxable. If you don’t qualify for the standard deduction or you think you can get more money taken off of your taxable income, you may want to try itemized deductions.
If you have proof of the things you are deducting, such as receipts and other documentation, you may want to try itemized deductions. This is where you can deduct such things as medical expenses, moving expenses if you moved for business reasons, hobby expenses, work-related expenses, and so much more. There are hundreds of deductions that you can take advantage of. If you’re self-employed, you can deduct office-related expenses, travel expenses (can be deducted if traveling for work-related reasons), and a percentage of the utility bills for your home if you work in a home office. The percentage of utility bills that can be claimed are equal to the percentage of the home the office occupies. If your office consumes only 10% of your home, you can take a 10% deduction of those utility expenses.
However, you do have to keep in mind that there are limits set in some areas before you can claim the deduction. Take depreciation, for instance. You can only claim an office item if it cost at least $100. If not, then you may get a few dollars for it, but that is it. You can choose to take a one time deduction, which will reduce your current tax liability more, or you can choose to depreciate over a 5 year period, which will take a little off of your tax liability for the next 5 years.
There are other areas that also have threshold limits. If you don’t reach the limit, you can’t claim the deduction. Luckily, there are more areas that do not have this rule than areas that do. So you may decide that you do want to take the itemized deductions over the standard deduction just to see which will give you the better return. Itemized deductions take more time, but they can result in a better return.