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The Internal Revenue Service collects only on your taxable income. So an easy way to cut your tax bill is to reduce your taxable income.
You do that by claiming deductions when you file. But the exact way you take these deductions depends on your personal circumstances.
There are two common deduction methods: standard or itemized.
The standard deduction amount is different for each filing status and is adjusted for inflation each year. You can find the amount that fits your filing situation on each of the tax return forms: 1040, 1040A or 1040EZ.
Most taxpayers take the standard deduction, which can be claimed on any of the three individual tax returns. These filers find that the standard deduction exceeds the amount they could achieve by itemizing. Even better, it also means they don’t have to keep track of each possible tax-deductible expense throughout the year.
Other filers find that the record keeping is worthwhile. By tracking tax-related costs, they can cut their IRS bill substantially by collecting receipts, maintaining expense logs and completing the long Form 1040 and Schedule A. Itemizing, however, isn’t always what it’s cracked up to be. In fact, your overall itemized deduction amount could be reduced if you make what the IRS considers too much money.
In addition to deductions, each filer gets to claim exemptions to help reduce taxable income. Exemptions are the tax-form version of the allowances you enumerated on your W-4. This exemption amount — for you, your spouse and any dependents — is available to every filer, regardless of which deduction method is used.