When struggling with the filing personal taxes at the end of the year, we all find ourselves asking the same question: Should I itemize my return or opt for the standard deduction? Business taxes are an entirely different kettle of fish, so it's important to note that deductions for businesses and individuals require different sets of paperwork entirely.
Essentially, deductions exclude a portion of an individual's earnings from being taxed. The IRS recognizes that living costs are a very real issue, and as a result, they do not expect people to pay tax on every single dollar earned. Standard deductions are set by the IRS and change from one year to the next. These deductions are intended to help taxpayers exempt a set portion of their income from taxes. Itemized deductions, on the other hand, allow individuals to apply their own specific expenses in a bid to lower their taxable income. The rules on itemized deductions are stricter but they offer a much more customized approach to tackling your yearly tax return.
It's important to note that you can't follow both roads. It's a distinct either/or situation. It takes some figuring out, but it's fairly simple to figure out which option reduces your tax liability the most. More often than not, individuals will hire a seasoned tax professional to help them calculate the best way forward.
The IRS claims that approximately 60% of taxpayers choose the standard deduction rather than the itemized option. The deduction amount depends on an individual's filing status - whether they are single, head of the household, married filing jointly, married filing separately, or a qualifying widow or widower. Additional deductions are calculated based on age and blindness.
Opting for itemized deductions is a lot more labor-intensive than simply choosing the standard option. Renters are generally better off steering clear of itemized deductions whereas homeowners tend to do quite well. In addition to property-related expenses, individuals can also claim back on charitable contributions, retirement plan contributions, out of pocket medical expenses, and losses on investments, among others.
Individuals who are self-employed are able to deduct additional expenses incurred in order to generate an income. This includes mileage deductions when visiting clients as well as home-office deductions should business be conducted from home. Any other related expenses, such as office supplies or utility bills, can also be added to the list.
Deciding whether or not to opt for the standard deduction rather than the itemized deduction is as simple as crunching some numbers, and comparing which option offers a greater reward. High-income earners, in particular, need to be careful with their calculations, as the value of certain deductions tends to decrease once an individual passes a certain threshold.
Overall, while there's a clear reason that so many households opt for the standard deduction, it is still a good idea to hire a professional to assist with both personal taxes and business taxes. Professionals may be able to spot something you might have missed in your own calculations.
ALJ Business Services,LLC