Personal Deductions
Thanks to the complexity of the United States tax codes, the
system itself, and the variations of tax codes from state to
state, completing your personal tax return and maximizing your
deductions and exemptions to their fullest potential, is like
trying to complete a mind-twisting maze. The average individual
required to file a personal tax return has no grasp of the US
tax system, and must therefore rely on one of the many tax
professionals to complete their return. Quite often, deductions
and exemptions are overlooked simply because of a lack of
communication. The following article will discuss the personal
deductions available to the individual tax payer, and the fact
that qualifying for these deductions must be communicated to the
tax preparer.
The really big one that most all taxpayers are familiar with is
the standard versus itemized deduction that removes a large
amount of the tax liability. The standard deduction is $3200 per
personal exemption claimed on the tax return. If you're a
taxpayer and spouse, with three children your standard deduction
would be $16,000. That's a lot of money to deduct from your tax
liability. Again, however most everyone understands how this
deduction works, and that the information to accurately
configure this deduction is provided at the time of preparation
and filing. What about the itemized deduction? Why are we given
a choice of standard or itemized? We're given a choice because
on the itemized deductions, or Schedule A of the 1040, certain
expenses are allowed a deduction that might prove to be a bigger
benefit for the taxpayer. What are these allowable deductions?
Medical expenses, certain taxes paid, mortgage interest expense,
points paid on your mortgage, charitable gifts, casualty and
theft losses, and unreimbursed employee expenses cover the vast
majority. Sometimes, the taxpayer's expenses in a certain area
for one year exceed what is considered the normal level, and
filing itemized deductions creates a bigger savings than the
standard deduction allowed. It is for this reason, that the
taxpayer must be aware of these deductions, and make the tax
preparer aware that an unusual situation exists. The stipulation
that exists here is that often the deduction is limited to a
percentage of the adjusted gross income.
What other deductions are available to take that directly affect
the adjusted gross income? Some of these are not as well known,
yet have a bigger impact on the amount of tax liability you will
incur based on your individual tax return. Educator expenses or
expenses you incur as a teacher in the education system are
deductible to a certain level and are not restricted by the
percentage rules of the itemized deductions. Health savings
accounts, medical savings accounts, and individual retirement
accounts are other deductions that are applied on a dollar for
dollar basis. If you happen to be among the nations
self-employed, there are additional deductions for an SEP, or
self-employed pension fund, health insurance premiums expense,
and one-half of your self-employment tax that remove tax
liability, dollar for dollar spent. Are you a student that pays
student loan interest, or part of your qualified tuition and
fees? Then you're also eligible for a dollar for dollar
deduction. This has proven to be an exceptionally wonderful
benefit for many of the non-traditional students returning to
school in their thirties and forties, that struggle to pay
tuition and fees. This is also deductible if you paid these
expenses for a dependent child to attend college. The only thing
to make sure that you guard against is double deduction. Don't
take the deduction if your child is taking the deduction on
their tax return. Generally, however, if a parent is providing
the support for their child to attend college, the child doesn't
file a tax return at all; usually they're still being claimed as
a dependent.
Did you have to move this year, in order to keep your job? Did
you take a new job that required you to move? Moving expenses is
also a tax deduction that is tremendously overlooked, and not
taken as a deduction. Why? Generally, the deduction is taken
because many of the individual taxpayers that would qualify for
the deduction simply aren't aware that the deduction exists.
As you ready yourself for the "blow" of the tax man's axe, keep
in mind that we often can reduce the burden of our tax liability
simply by educating ourselves about the basic information we
should provide to our tax preparers. The better job we do in
providing them with information, the better job they can do with
providing us a refund!