If you haven’t filed your taxes yet, don’t panic — but act fast.
Deduction is a money term you need to understand. Here’s what it means.
What is a deduction?
A deduction is an amount that you can deduct from your gross income to lower the amount of tax you pay. The IRS offers taxpayers the option of using a standard deduction or to itemize individual deductions. For single people and married people filing separately, the standard deduction is $6,350 for the 2017 tax year. For married people filing jointly, the standard deduction is $12,700.
The IRS allows taxpayers to deduct certain amounts of money from their gross income to legitimately reduce their tax bill. The amount that can be deducted depends on the marital status of the taxpayer and whether married taxpayers file separately or jointly. The amount that can be deducted is adjusted each year in line with inflation.
Apart from being categorized as single or married, the IRS allows certain taxpayers to claim a deduction as a head of household. This is someone who is unmarried, is responsible for more than half the household expenses and lives with dependent family members.
As an alternative to the standard deduction, taxpayers who incur qualifying expenses have the choice of itemizing their deductions. This benefits the taxpayer if the itemized deductions exceed the standard deduction applicable to the taxpayer. Qualifying expenditures that can be itemized for deduction include:
- Medical expenses.
- State and municipal taxes.
- Personal property taxes.
- Interest on mortgages.
- Interest from investments.
- Gifts to qualifying charitable organizations.
The IRS has rules regarding itemizing deductions so that not all qualifying expenditures can be deducted. Additionally, the amount that may be claimed as a deduction is capped for taxpayers who have large incomes.
Taxpayers can either claim the standard deduction or itemized deductions, but not both.
John is a single parent whose child has incurred significant medical expenses during the tax year. John has a mortgage and supports several qualifying charities. When he prepares his tax return he itemizes each qualifying expense, and using the IRS guide for individual deductions, he calculates that he can claim $12,350 in deductions. Because this amount is greater than the $9,350 standard deduction for a head of household, he submits his tax return using itemized deductions and reduces his tax obligations.
Do you know which deductions you can claim? Use Bankrate’s tax calculator to see if it makes sense to itemize deductions.
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