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Itemized Deduction Definition for Beginners to Expert

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Itemized Deduction Definition for Beginners to Expert.

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Itemized Deduction Definition for Beginners to Expert

Itemized deductions is comprised of several types of certain expenses that you incur throughout the year. If the total amount of these expenses is larger than the standard deduction amount, you should itemize instead of taking the standard debt. In this article, we will be focusing on itemized deduction definition for beginners to experts.

What are Itemized Deductions?

The Internal Revenue Service (IRS) allows taxpayers to deduct certain expenses in order to legitimately reduce their taxable income. There are two options: the standard deduction or the itemized deductions. The standard deduction is a single, fixed deduction, whereas itemized deductions comprise a variety of expenses that may add up to a greater amount than the standard deduction.

Deeper Definition

Both the standard deduction and itemized deductions will lower adjusted gross income (AGI) and reduce taxes owed, but choosing which one to use depends on a taxpayer’s specific circumstances. For single people and married people filing separately, the standard deduction is $6,350 for the 2020 tax year.

For married people filing jointly, the standard deduction is $12,700. You’re standard deduction increases if you are 65 or older or blind. State and local taxes (SALT) including income, property, and sales taxes can be itemized for deduction. About one-third of taxpayers itemize deductions on their federal tax returns, and nearly all itemizers claim a deduction for local and state taxes paid.

Itemizing deductions is a good option if a taxpayer faces large uninsured or unreimbursed medical or dental expenses. For the tax year 2020, medical expenses must exceed 10 percent of AGI before they may be itemized for deduction, and even then only the amount exceeding the 10 percent threshold may be deducted from income.

Other major itemized deductions include unreimbursed business expenses; significant charitable donations; huge property or sales taxes; and uninsured casualty or theft losses. Like medical costs, unreimbursed losses must exceed 10 percent of your AGI in order to qualify for the deduction. A host of other expenses and miscellaneous debts are available to be itemized, subject to eligibility.

Above-the-line deductions also referred to as adjustments to income, can be used to lower your AGI whether you itemize or take the standard deduction. These include contributions to health savings accounts; aids to individual retirement accounts (IRAs) and other pension savings plans; student loan interest, student tuition payments, and certain student fees; alimony payments; and a long list of other expenses.

Standard vs. Itemized

A standard tax deduction is a fixed dollar amount that decreases taxable income, and the amount depends on your filing status. For 2020 a single taxpayer can claim a $12,000 standard deduction, while a married couple filing jointly can claim $24,000.

Itemized deductions are expenses allowed by the IRS to decrease a taxpayer’s taxable income. Itemized deductions allow you to list qualified costs on your tax return, the sum of which (based on your tax bracket) is used to lower your AGI. Itemizing can result in a larger reduction of taxable income if your final itemized deductions, based on your tax bracket, exceed the amount of the standard deduction.

Breaking Down an Itemized Deduction

Every year, the U.S. government provides potential tax relief to taxpayers in the form of tax credits and deductions.

  • A tax credit reduces your final tax bill. If your tax liability is $15,000 and you qualify for a $3,500 tax credit, you will only have to pay $11,500 in tax.
  • A tax deduction reduces your taxable income in a different way. If you qualify for $14,000 in tax deductions and are in the 22% bracket, those deductions will lower your taxable income by 22% of $14,000, or $3,080. So if your taxable income is $75,000, the deduction will lower it to $71,920. In this case your tax liability drops by $671, from $12,434 to $11,763.

A tax deduction can either be claimed as a standard deduction or as itemized deductions through filing Schedule A along with Form 1040. The route to take depends on which deduction type lowers your liability the most. You must make that choice each year.

Here are Some Helpful Tips to Summarize the Itemized Deductions Process:

Choose one or the other: Itemized deductions or the standard deduction.

If you cannot itemize, you might be able to file a form 1040-EZ which is a shorter and simpler version of the traditional 1040 form. You may also be able to file your federal tax return using TurboTax absolutely free. If you bought a house this year, there is a good chance that you will now be eligible to itemize.

Finally, no matter which deduction you choose, these deductions are your associate they allow you to pay fewer taxes. Once you get the swing of itemizing your deductions, start to keep detailed records of all your eligible costs. This will help to make the tax procedure that much less painful.

NG Team.

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